SECURITIES AND EXCHANGE COMMISSION
FORM SB-2 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
INNOVATIVE MEDICAL SERVICES
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 3841 33-0530289
(State of Incorporation) (Primary Standard (IRS Employer ID No.)
Classification Code)
1725 Gillespie Way, El Cajon, California 92020
(619) 596 9600
(Address and Telephone Number of Registrant's Principal
Executive Offices and Principal Place of Business)
MICHAEL L. KRALL
1725 Gillespie Way, El Cajon, California 92020
(619) 596 9600
(Name, Address and Telephone Number of Agent for Service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE
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Title of each Proposed Proposed
class of Amount Maximum Maximum Amount of
securities to be offering price aggregate registration
to be registered registered per unit offering price fee
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Common Stock of
Selling Securities
Holders 282,766 $1.75* $494,840.50 $149.94
* Estimated Price in accordance with Rule 457(h)and based upon the last
reported sale on the NASDAQ SmallCap Market on February 16, 1999.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
THE EXHIBIT INDEX APPEARS ON PAGE II-4 OF THE SEQUENTIALLY NUMBERED PAGES
OF THIS REGISTRATION STATEMENT. THIS REGISTRATION STATEMENT, INCLUDING
EXHIBITS, CONTAINS 58 PAGES.
<PAGE>
INNOVATIVE MEDICAL SERVICES
CROSS REFERENCE SHEET FOR REGISTRATION STATEMENT ON FORM SB-2
ITEM REGISTRATION STATEMENT HEADING LOCATION IN PROSPECTUS
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus Inside Front and Outside Back
Cover Pages of Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Risk Factors; Description of
Securities
6. Dilution Not Applicable
7. Selling Security Holders Selling Securities Holders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Legal Proceedings
10. Directors and Executive Officers Management
11. Security Ownership of Certain
Beneficial Owners and Management Principal Shareholders
12. Description of the Securities to be
Registered Prospectus Summary;
Description of Securities;.
Outside Front Cover Page of
Prospectus;
13. Interest of Named Experts and Counsel Not Applicable
14. Statement as to Indemnification Indemnification
15. Organization within 5 Years Business of the Company
16. Description of Business Business of the Company
17. Management's Plan of Operation Business of the Company
18. Description of Property Business of the Company
19. Certain Relationships and Related
Transactions Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters Market for Shares
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes in Disagreements With
Accountants Not Applicable
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PROSPECTUS
LOGO
3,687,500 SHARES OF COMMON STOCK UNDERLYING CLASS A REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
282,766 SHARES OF COMMON STOCK OFFERRED BY THE SELLING SECURITIES HOLDERS.
Innovative Medical Services (the "Company") is offering 3,687,500 shares of
common stock at $5.25 per Share to the holders of the Company's 3,687,500
Class A Warrants (the "Shares" and "Class A Warrants"). Each Class A
Warrant entitles the holder to acquire an additional common share for $5.25
per common share.
The Class A Warrants are redeemable by the Company for $0.05 per Class A
Warrant provided the closing bid price for the shares have averaged in
excess of $9.00 per share for any twenty (20) trading days within a period
of thirty (30) consecutive business days ending within five (5) days of the
date of a Notice of Redemption. See "DESCRIPTION OF SECURITIES."
The Shares and Class A Warrants are traded on The Nasdaq SmallCap Market
under the symbols PURE and PUREW.
THESE ARE SPECULATIVE SECURITIES, INVOLVE A HIGH DEGREE OF RISK AND SHOULD
BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE
INVESTMENT. (SEE "RISK FACTORS.")
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISSAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRICE TO PROCEEDS TO
CLASS A WARRANT HOLDERS COMPANY(1)
Per Share $5.25 $5.25
3,687,500 Common Shares $19,359,375.00 $19,359,375.00
(1) Before deduction of expenses of the Offering payable by the Company
estimated at $35,000.
The date of this Prospectus is __, 1999
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The Company is subject to and will comply with the periodic reporting
requirements of Section 12(g) of the Securities Exchange Act of 1934. The
Company will furnish to its Shareholders an Annual Report containing
financial information examined and reported upon by independent certified
public accountants, and it may also provide unaudited quarterly or other
interim reports as it deems appropriate. The Company's Registration
Statement on Form SB-2 with respect to the Securities offered by this
Prospectus, (a part of the Registration Statement) as well as its periodic
reports may be inspected at the public reference facilities of the U.S.
Securities and Exchange Commission, Judiciary Plaza, 450 Fifth Street, N.
W., Room 1024, Washington, D. C. 20549, or at the Commission's regional
offices at Northwestern Atrium Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661 and at 7 World Trade Center, New York, New York
10007. Copies of such materials can be obtained from the Commission's
Washington, D. C. office at prescribed rates.
The Company has filed a Registration Statement of which this Prospectus is
a part which registers 40,000 shares of common stock underlying options
issued to a consultant of the Company and 242,766 shares of common stock
issued to certain investors in a Private Placement conducted in January,
1999.
The Company is not offering any of the Selling Securities Holders
securities in the Offering. These shares may be sold by the holders thereof
from time to time at prevailing market prices. The Company will not receive
any of the proceeds from any sale of the Selling Securities Holders shares.
See "Description of Securities", "Additional Securities Being Registered"
and "Selling Security Holders".
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PROSPECTUS SUMMARY
THE COMPANY: Innovative Medical Services was incorporated in the State of
California in 1992, to pursue the immediate business of manufacturing and
marketing the Fillmaster and subsequently a broadly based business of
delivering advanced technology, equipment and supplies to the pharmacy
industry, in addition to pursuing the business of residential water
filtration. During its first three years, the Company established the
production and design, entered into contracts with its parts suppliers and
manufacturers, developed its initial assembly process and implemented its
marketing program for the Fillmaster.
The Company's cornerstone product is the Fillmaster(R) pharmaceutical water
purification and dispensing system. The Fillmaster provides measured
amounts of purified water for reconstitution of liquid oral antibiotics and
certain other pharmacy applications. The Fillmaster System uses a six-stage
water purification unit featuring an electronic water purity testing module
and an auxiliary faucet for dispensing purified water. The 'Fillmaster
System integrates with the building's tap water plumbing, is closed and
pressurized and, according to the Company's testing, has a fill rate at
least three times that of current bottle-and-hose methods - the only know
competition.
In the past two years, the Company has launched four new products, the
Fillmaster 1000e and three products in the Company's Nutripure line of
residential drinking water systems. The Company continued its marketing
campaigns to expand into new markets while pursuing development of future
products. The Company has also established an export/import operation to
distribute medical supplies and its water filtration products in Brazil.
SECURITIES OFFERED: 3,687,500 Shares underlying the outstanding Class A
Warrants. Each Class A Warrant entitles the holder to acquire an additional
common share for $5.25 per common share beginning the date of this
Prospectus and expiring August 8, 2001. See "Description of Securities".
USE OF PROCEEDS: The Company intends to use the net proceeds from this
Offering and any additional funds generated from operations for Inventory,
and Sales and Marketing. Please see "Use of Proceeds" and "Business of the
Company".
ADDITIONAL SECURITIES BEING REGISTERED The Company has filed a
Registration Statement of which this Prospectus is a part which registers
40,000 shares of common stock underlying options issued to a consultant of
the Company and 242,776 shares of common stock issued to certain investors
in a Private Placement conducted in January, 1999.
The Company is not offering any of the Selling Securities Holders
securities in the Offering. These shares may be sold by their holders from
time to time at prevailing market prices. The Company will not receive any
of the proceeds from any sale of the Selling Securities Holders shares. See
"Description of Securities", "Additional Securities Being Registered" and
"Selling Security Holders".
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RISK FACTORS
These Securities involve a high degree of risk. Prospective purchasers
should consider carefully, among other factors set forth in the Prospectus,
the following:
RISK FACTORS RELATING TO THE COMPANY
1. Limited Operating History. As of July 31, 1998 the Company had an
accumulated deficit of $4,101,330. The Company was formed in 1992 and
commenced the manufacture and marketing of its Fillmaster(R) product in the
final quarter of fiscal year 1993. As a result, it is subject to the risks
inherent in a new enterprise, including the absence of a lengthy operating
history, shortage of cash, undercapitalization and new products. (Please
see "The Company and its Business.")
2. Competition. The Company believes that the business of providing
advanced technology apparatus to the pharmaceutical industry is relatively
new and that it is likely that the Company will face extensive competition
as the market develops. These competitors are likely to be larger and have
greater financial resources than the Company. As a result no assurances can
be given that the Company will be able to obtain and maintain sufficient
market share to be successful.
3. Dependence on Management. The success of the Company will be dependent
largely upon the efforts of its present management. To the extent the
services of management would be unavailable to the Company for whatever
reason, the Company would be required to obtain other executive personnel
to manage and operate the Company. In such event, there can be no assurance
that the Company would be able to employ qualified persons on terms
favorable to the Company. Although the Company has Key Man Life Insurance
on its President, Michael L. Krall, it is anticipated that the Company will
remain primarily dependent upon the efforts of Management. (Please see
"Management.")
4. Regulation of Pharmaceutical Products. The United States Food and
Drug Administration has established a Good Manufacturing Practices protocol
which requires that products be built to certain standards and specifically
that an apparatus used in handling anything added to a prescription not
cause any contamination of the prescription. The Company believes that all
components and materials in its Product meet or exceed the current FDA
standards. However no assurances can be given that FDA standards will not
change in the future. In addition, the United States Pharmacopeia and the
National Formulary (USP/NF) provide the standards for materials and
substances and their preparations that are used in the practice of healing
arts and establish standards of quality, strength and purity. The USP/NF
require that only "Purified Water" be used in the reconstitution of oral
prescriptions. Also, State Boards of Pharmacy uniformly defer to the
standards of the USP/NF. In addition, drug manufacturers themselves require
the use of "Purified Water" to ensure product stability and potency. While
the Company's Fillmaster(R) meets or exceeds the USP requirements for
"Purified Water", no assurance can be given that the current regulations
will not be modified or that new regulations be implemented which could
adversely effect the Company's business.
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RISK FACTORS RELATING TO THIS OFFERING
1. Public Will Bear Risk of Loss. The capital required by the Company to
increase the scope of its business is being sought principally from the
proceeds of this Offering. Therefore, public investors will bear most of
the risk of the Company's operations. (Please see "Underwriting.")
2. Potential Reverse Split of Outstanding Shares. On December 19, 1998,
the Company's shareholders authorized the Company's Board of Directors to
declare an up to four to one reverse split of the outstanding common stock
on or before December 31, 1999 and as and when the Board deems it necessary
to prevent the delisitng of the common stock from the NASDAQ SmallCap
Market for failure to maintain a $1.00 minimum bid price. Such a reverse
split could result in an effective cost basis of $10.50 to $21.00 per
share for shares received pursuant to an exercise of the Class A Warrants
prior to the effective date of such a reverse split and may have a
materially adverse effect upon the holder's ability to realize a profit
upon the shares.
3. Lack of Dividends. The Company has never paid a dividend on its common
stock and intends to retain all earnings for the foreseeable future in
order to complete its business plan.
4. Potential Adverse Effect of Shares Issuable Upon Exercise Of Stock
Options And Outstanding Shares Available for Resale. The Company has
adopted a 1996 Incentive Stock Option Plan, a 1996 Directors and Officers
Stock Option Plan and a 1998 Directors and Officers Stock Option Plan. The
Company has reserved 1,000,000, 1,000,000 and 2,000,000 Common shares for
issuance under each respective plan. As of the date of this Prospectus
options to acquire 1,270,250 shares have been awarded pursuant to the 1996
and 1998 Directors and Officers Stock Option Plan. In addition, 1,147,972
of the Company's presently outstanding 4,392,242 shares of common stock are
"restricted securities" as defined by Rule 144 adopted under the Securities
Act of 1933, as amended. Rule 144 is a regulated method for holders of
restricted securities to sell their securities into the market. Nearly all
of holders of such restricted securities have held the securities for the
time period required by Rule 144 and may sell their securities. Such sales
and the exercise of options and sale of underlying shares could have an
adverse effect on the market for the Shares. (Please see "Market for
Company's Common Stock and Related Stockholder Matters.")
5. Determination of Offering Price. The Class A Warrant exercise price
was arbitrarily determined by the Company and the Underwriter of the
Company's initial public offering in 1996. The exercise price does not
bear any relationship to the assets or book value of the Company or any
other objective measure of value. Accordingly no assurances can be given
that the market price for the Shares underlying the Class A Warrants will
be at or above the exercise price.
6. Maintenance Criteria for Nasdaq Securities. The National Association
of Securities Dealers, Inc. (the "NASD"), which administers the Nasdaq
SmallCap Market has established the criteria for continued Nasdaq
eligibility. In order to continue to be included in the Nasdaq SmallCap
Market, a company must maintain $2 million in total assets, a $200,000
market value of its public float and
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$1 million in total capital and surplus. In addition, continued inclusion
requires two market-makers, at least 300 holders of the Shares and a
minimum bid price of $1 per share; provided, however, that if a company
falls below such minimum bid price, it will remain eligible for continued
inclusion in Nasdaq if the market value of the public float is at least $1
million and the Company has $2 million in capital and surplus. The
Company's failure to meet these maintenance criteria in the future may
result in the discontinuance of the inclusion of its securities in Nasdaq.
In such event, trading, if any, in the securities may then continue to be
conducted in the non-Nasdaq over-the-counter market in what are commonly
referred to as the electronic bulletin board and the "pink sheets". As a
result, an investor may find it more difficult to dispose of or to obtain
accurate quotations as to the market value of the securities. In addition.
the Company would be subject to a Rule promulgated by the Securities and
Exchange Commission (the "Commission") that, if the Company fails to meet
criteria set forth in such rule, imposes various sales practice
requirements on broker-dealers who sell securities governed by the Rule to
persons other than established customers and accredited investors. For
these types of transactions, the broker-dealer must make a special
suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale.
Consequently, the rule may have an adverse effect on the ability of
broker-dealers to sell the securities, which may affect the ability of
purchasers in the ofering to sell the securities in the secondary market.
7. Disclosure Related to Penny Stocks. The Commission has adopted rules
that define a "penny stock". In the event that any of the Company's
securities are characterized in the future as penny stock, broker-dealers
dealing in the securities will he subject to the disclosure rules for
transactions involving penny stocks which require the broker-dealer among
other things to (i) determine the suitability of purchasers of the
securities, and obtain the written consent of purchasers to purchase such
securities and (ii) disclose the best (inside) bid and offer prices for
such securities and the price at which the broker-dealer last purchased or
sold the securities. The additional burdens imposed upon broker-dealers may
discourage them from effecting transactions in penny stocks, which could
reduce the liquidity of the securities offered hereby.
8. Redemption of Warrants. The Class A Warrants may be redeemed by the
Company at any time upon 30 days written notice to the Warrant holders at
$0.05 per Warrant provided the closing bid price for the Company's common
shares shall have averaged in excess of $9.00 per share for any twenty (20)
trading days within a period of thirty (30) consecutive business days
ending within five (5) days of the date of a Notice of Redemption. In such
event, the Class A Warrants will only be exercisable until the close of
business on the date fixed for redemption in such notice. Any Class A
Warrants not exercised by such time will cease to be exercisable, and the
holders will be entitled only to the redemption price. (See "Description of
Securities.")
9. Non-Registration in Certain Jurisdictions of Shares Underlying the
Warrants. The Class A Warrants are not convertible or exercisable unless,
at the time of exercise, the Company has a current prospectus covering the
shares of Common Stock issuable upon exercise of the Class A Warrants and
such shares have been registered, qualified or deemed to be exempt under
the securities laws of the state of residence of the holders of such Class
A Warrants. There can be no assurance that the Company will have or
maintain a current prospectus or that the securities will be qualified or
registered under any state laws. Purchasers may buy Class A Warrants in
the after-market or may
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<PAGE>
move to jurisdictions in which the shares underlying the Class A Warrants
are not registered or qualified during the period that the Class A Warrants
are exercisable. In this event, the Company would be unable to issue Common
Stock to those persons desiring to exercise their Class A Warrants unless
and until the shares could be qualified for sale in jurisdictions in which
the purchasers reside, or an exemption from this qualification exists in
such jurisdiction. Accordingly, Class A Warrant holders would have no
choice but to attempt to sell the Class A Warrants in a jurisdiction where
such sale is permissible or allow them to expire unexercised. (See
"Description of Securities")
10. Limitation on Directors' Liability. The Company's Articles of
Incorporation provide for certain limitations on the liability of the
Company's directors to its stockholders for monetary damages. Such
limitations could adversely affect an investor's ability to recover damages
from such directors.
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USE OF PROCEEDS
The net proceeds of the Offering will be $19,324,375 after the payment of
offering expenses estimated at $35,000 if all of the Class A Warrants are
exercised prior to their expiration in August 2001. The Company will
utilize the net proceeds as and when received primarily for the purchase of
inventory to the extent necessary to fulfill sales orders without using the
Company's credit facilities. Thereafter the Company will use proceeds for
Sales and Marketing.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of July
31, 1998 and on a pro forma basis giving effect to the exercise of the
Class A Warrants offered hereby and the application of the net proceeds
therefrom as described in "Use of Proceeds".
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July 31, July 31,
1998 1998
---- ----
Historical Proforma(1)
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Stockholders Equity $6,125,718 $26,207,204
20,000,000 no par common shares authorized
3,961,351 outstanding at July 31, 1998
8,081,617 outstanding at July 31, 1998 Pro Forma (1)
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Class A Warrants 108,750 0
3,687,500 outstanding at July 31, 1998
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Accumulated Deficit (4,101,330) (4,101,330)
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Total Capitalization $2,133,138 $22,214,624
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(1) Gives effect solely to the sale of 3,687,500 common shares.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the audited financial statements of the Company and related notes included
therein.
Overview
Innovative Medical Services, through an aggressive, growth-oriented
business strategy, has built a strong market presence in the manufacturing
and marketing of pharmacy efficiency products, as well as in water
filtration systems. Since its founding in August 1992, and subsequent to
its initial public offering in August 1996, the Company has invested in its
research and development department, production facilities and sales and
marketing resources. The Company's principal products are the
Pharmapure(R) pharmacy water purification system, the Fillmaster(R)
dispensing units for reconstituting oral suspensions, and the Nutripure(R)
line of residential drinking water systems. The Company also markets, for
all water filtration products, proprietary filters that require changing at
intervals of nine to twelve months. Filter replacements represent a
significant continuing source of revenue to the Company.
In addition, Innovative Medical Services markets the Medifier(TM), a unique
magnifying device for use with any size prescription bottle label, targeted
to the growing elderly population. The Medifier represents a low-cost
entry into the retail pharmacy market and will be sold through the
Company's current distribution channels as well as through catalogues and
promotional products distributors.
Innovative Medical Services also owns Export Company of America, Inc.
(EXCOA), a Nevada corporation that holds and operates the Company's
Brazilian export/import operation. The Company distributes medical, dental
and veterinary supplies into Brazil and plans to use this distribution
conduit for the Company's water filtration products.
Results of operations Fiscal 1998 vs. Fiscal 1997
Revenues of $1,675,100 in the fiscal year ended July 31, 1998 were 63%
higher than the $1,024,700 in revenues reported for the fiscal year ended
July 31, 1997. Fillmaster Purification System sales in the year ended July
31, 1998 were $1,082,000 and replacement filter sales were $439,100. In the
prior year, Fillmaster Purification System sales were $848,200 and
replacement filter sales were $141,200. Sales of the Fillmaster
Purification System rose 28% over the prior period. Sales of filters rose
211% in fiscal 1998 as expected due to the continually increasing number of
Fillmaster Purification Systems in use.
Gross profits for the year ended July 31, 1998 were $673,100 versus
$303,800 in 1997. Gross profit percentage of 40% in 1998 was higher versus
30% in 1997. The gross profit increase reflects increased filter sales in
the current year. As the number of Fillmaster system installations
increases, so will the volume of replacement filter sales and the related
improved gross profit margins.
Net loss for the year ended July 31, 1998 was $1,902,800 versus a net loss
of $1,407,300 for the same period in 1997. This decrease was due in part
to the $200,400 or 46% increase in Selling Expenses, which includes
marketing and advertising costs incurred to promote the Company's products.
In addition, General and Administrative Expenses increased approximately
$432,700 or 32% from 1997 to 1998 due to continued product development
costs, associated expenses for additional management and sales personnel,
and costs associated with the development of new markets. Revenues for the
year were less
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than previously anticipated because a large corporate order will be
recognized in the first quarter of fiscal 1999 instead of the fiscal 1998
fourth quarter. Also, the Company took a one-time charge of approximately
$450,000 by writing off remaining prepaid investment banker fees for which
management believes it will derive no further value. During the current
fiscal year the Company incurred expenses of $177,400 for Research and
Development costs associated with production and development of new
products.
Liquidity and Capital Resources
During the fiscal year ended July 31, 1998, the Company's current assets to
liabilities ratio fell from 17.85 to 1.21. Current assets decreased
$1,824,400 from $2,834,500 to $1,010,100. Current assets at July 31, 1998
include $360,600 of inventories consisting mainly of new electronic
dispensers built in the fourth quarter for the cancelled order. Noncurrent
assets include $1,096,900 of deferred acquisition costs comprised largely
of investment banker fees related to the acquisition of a Florida export
company and a related medical supply company located in Brazil. Current
liabilities increased $678,600 from $158,800 to $837,400. The increase in
current liabilities was the result of increased accounts payable associated
with a corresponding increase in inventories. Also, the Company has
established a line of credit during the period on which it has drawn
$295,000.
Cash flows used from operations were $1,994,100 in fiscal year 1998 and
$1,282,500 in 1997. For those periods, cash flows used in investing
activities were, respectively, $232,300 and $590,600 for the purchase of
machinery and equipment and for leasehold improvements. The total decrease
in cash and cash equivalents for the 1998 period was $1,934,400 which was
largely a result of an increase in inventory and an increase in deferred
acquisition costs. The Company generated $4,236,200 from a public offering
during the 1997 period resulting in a net increase in cash equivalents of
$1,961,000.
The Company operates on a just-in-time assembly and manufacturing basis and
typically keeps inventory to low levels. Parts and components are brought
into the factory for assembly and shipment only after a firm customer order
has been received. As a result, the time period during which cash
resources must be utilized for inventory is compressed as much as possible.
Future Outlook
Fillmaster Sales to Chain Pharmacies. Long term profitability of the
Fillmaster System product line depends on establishing a substantial number
of Fillmaster units installed and in use. Since each unit requires
replacement of its filters at least once a year, each new system installed
becomes a source of steady future income potentially exceeding the income
from the initial sale of the Fillmaster System. In addition, each pharmacy
using the Fillmaster becomes an easily approachable candidate for any new
pharmacy tools developed by the Company in the future. The Company
continues to build an ever-increasing sales revenue base of chain
pharmacies with sales and marketing expenditures a fraction of those
necessary to reach independent and hospital pharmacies. To date,
Fillmaster Systems are installed in approximately 9,500 pharmacies, an
increase of 36% over last year's total. The 9,500 locations represent
approximately 13% of the total pharmacy market. Although 13% constitutes
a significant hold on the pharmacy market, the Company sees significant
growth potential for the Fillmaster System in both the United States and
abroad.
The Fillmaster System is specified as standard equipment for all newly
constructed and remodeled pharmacies at Walgreen's, Wal-Mart, Target, Fred
Meyer, Osco, Jewel, Acme, Lucky, Sav-On, Kroger,
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Dillon Stores, United Supermarkets, Phar-Mor, Giant Eagle, Giant Foods,
Meijer, City Markets and Eckerd. Construction and remodeling installations
of Fillmaster Systems generate steady sales at a low cost of sales and,
therefore, a steady increase in replacement filter sales. The Company
expects that additional chain stores will add Fillmaster Systems to their
blueprints and specifications for new construction and remodeling of
pharmacies in the coming year. The Company will continue to aggressively
market the Fillmaster System to chain pharmacies and expects growth to
continue as the Fillmaster becomes an industry-wide standard in pharmacy
dispensing equipment.
Fillmaster Sales to Independent Pharmacies. The independent pharmacy market
represents more than 30,000 locations and remains an untapped market for
the Company. The Company continues its targeted Fillmaster System
marketing program and corresponding Nutripure Elite dealer program focusing
on the costlier-and more difficult-to-reach independent pharmacy market.
Capital expenditures are often difficult for the independent community
pharmacy because of limited cash resources. Becoming a Nutripure dealer
will offer the independent pharmacist a means of increasing cash flow and
thereby the means to purchase a Fillmaster. The Nutripure program depends
upon Fillmaster use by the independent pharmacists selling the residential
drinking water system, and the Company will offer extended payment terms to
dealers on their Fillmaster purchase to allow them time to sell Nutripure
units and use the proceeds to purchase the Fillmaster. Currently, the
Company's penetration is approximately 7%, and the Company expects its
independent pharmacy market share to substantially increase as the
Nutripure dealer program grows.
Other sales efforts in the independent pharmacy market have focused
primarily on offering price concessions based upon quantity sales to
members of independent buying cooperatives and quasi-chains created by
wholesale drug distributors. By accessing large numbers of pharmacies
through their cooperatives and wholesalers, the Company retains the
economies of scale associated with chain sales but generates higher margins
through higher negotiated pricing and direct sales to the customer. During
the last fiscal year, Innovative Medical Services continued increasing its
exposure to independent buying groups and developing its relationships with
decision-makers within the groups. The Company expects relationships with
independent pharmacy buying groups to result in volume sales of Fillmaster
Systems.
Nutripure Elite Sales through Independent Pharmacies
For years, Gallup polls have reflected the public's respect for pharmacists
as ethical and honest professionals, and the Company has based the
marketing of Nutripure Elite on both the pharmacist's reputation and
relationship with his customers as well as his testimonial as a Fillmaster
user to the quality of the product. The pharmacist's recommendation of a
system they use in their pharmacy to reconstitute prescriptions sets
Nutripure Elite apart from all other residential drinking water systems.
The Company currently has approximately 60 dealers of Nutripure Elite
products. As the targeted marketing program continues to inform
independent pharmacists of this revenue opportunity, the Company expects
the dealer network to exceed 200 dealers within the next 12 months.
The Company's research shows that consumer awareness of the quality of
water they consume has risen drastically over the past decade, and
continues to rise as municipal water supplies become less reliable.
Although the water filtration industry has many players, Innovative Medical
Services' Nutripure Elite systems incorporates the highest quality reverse
osmosis equipment available on the market today, and Nutripure Elite's
moderate retail price of $499 is very competitive. The Company believes
that Nutripure Elite's value, combined with the powerful recommendation of
the pharmacist and the unique distribution exclusively through independent
pharmacies will make it a significant source of revenue for the Company in
the coming year.
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Fillmaster and Nutripure Filter Sales
The water filtration industry sees its highest profit margin in after-market
filter sales, and as water systems are sold to pharmacies and to
home owners, filter sales for both products will continue to increase.
Filter sales during this past fiscal year doubled sales from the year
prior, and the Company expects that trend to continue as systems are sold
and customers subscribe to the automatic filter shipment program.
Medifier
The Company distributes the Medifier through catalogues, existing pharmacy
customers and promotional products distributors, and markets a private
labeling option for organizations wishing to purchase the Medifier as a
promotional item. The Company began marketing the Medifier during the past
fiscal year and expects sales to grow as exposure to and awareness of the
Medifier increases.
New Product Innovation
During first quarter of the fiscal year, the Company completed major
marketing campaigns for two new products: the Nutripure Elite line of
residential drinking water systems and the Fillmaster 1000e computerized
pharmacy water dispensing system. Revenues from sales of the Nutripure
Elite products were realized throughout the year, and revenues from sales
of the Fillmaster 1000e began to be realized in the fourth quarter of the
fiscal year.
Also during the year, the Company developed its entry-level water system,
Nutripure NP2000CT. After 18 months of extensive market research,
Innovative Medical Services completed development of this carbon countertop
system and released the product in June 1998. Nutripure NP2000CT,
developed specifically for mass merchandising, offers excellent water
filtration technology at competitive pricing through a unique marketing
approach: Nutripure is the only filtration system in its class of
countertop carbon systems that is "pharmacist recommended". National mass
merchandisers, drugstores, department stores and specialty stores are
currently evaluating the Nutripure NP2000CT, and Innovative Medical
Services expects sales to begin during the coming year.
The Company continues to develop new and innovative pharmacy efficiency
products and water filtration products and plans to release two new
products this year.
Acquisitions
In May 1998, Innovative Medical Services completed negotiating the
acquisition of AMPROMED, Rio de Janeiro, Brazil, and certain assets of
Export Company of America Inc. (EXCOA), Fort Lauderdale, FL, and
established a new Nevada subsidiary to hold and operate the export/import
operation. The government of Brazil is promoting growth and higher quality
health services by infusing $36 billion over the next five years into a
nationwide healthcare system. Innovative Medical Services believes that the
combined prospects of expanded disposable medical and dental product sales
with a massive public health initiative offers a bright future for the
AMPROMED operations. Innovative Medical Services has been awaiting the
required Brazilian business certification before commencing sales in
Brazil. The required Contract Social was granted by the Brazilian
government in October 1998, and AMPROMED will soon resume sales of
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medical products. In addition to medical supplies, Innovative Medical
Services plans to distribute water filtration products to Brazil through
AMPROMED. As in other emerging areas of the world, Brazilians have
recognized clean water as an integral element of good health, and consumer
awareness is growing rapidly. Innovative Medical Services expects to begin
realizing revenues from sales of medical supplies and water filtration
products in Brazil in the second quarter of 1999. The Company anticipates
that the acquisition will result in an additional $3 million in revenue in
the next year.
Innovative Medical Services, in cooperation with its investment banking
firm, continues to explore potential acquisition opportunities for medical
supply distribution, both domestic and abroad.
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THE COMPANY AND ITS BUSINESS
Company Overview
Innovative Medical Services (the Company) is engaged principally in the
business of manufacturing and marketing the Fillmaster(R), a water
purification, measuring and dispensing apparatus used in pharmacies to
reconstitute oral antibiotic suspensions. Innovative Medical Services has
also entered the consumer market with Nutripure(R), a residential drinking
water system. The Company markets, for both products, proprietary filters
that require changing at intervals of nine to twelve months or whenever
indicated by the systems' water quality monitors. The filter replacements
represent a significant continuing source of sales and cash flow to the
Company.
History
Innovative Medical Services was incorporated in the State of California on
August 24, 1992, to pursue the immediate business of manufacturing and
marketing the Fillmaster and subsequently a broadly based business of
delivering advanced technology, equipment and supplies to the pharmacy
industry, in addition to pursuing the business of residential water
filtration. During its first three years, the Company established the
production and design, entered into contracts with its parts suppliers and
manufacturers, developed its initial assembly process and implemented its
marketing program for the Fillmaster.
In August, 1996 the Company completed its initial public offering whereby
it sold 1,387,000 shares of its common stock at a public offering price of
$4.00 per share and 1,437,500 Class A Warrants at a public offering price
of $0.10 per Class A Warrant.
In the past two years, Innovative Medical Services has launched three new
products, the Fillmaster 1000e and three products in the Company's
Nutripure line of residential drinking water systems. The Company
continued its marketing campaigns to expand into new markets while pursuing
development of future products.
Finalized in October 1998, Innovative Medical Services completed the
acquisition of AMPROMED, Rio de Janeiro, Brazil, and certain assets of
Export Company of America Inc. (EXCOA), Fort Lauderdale, FL, and
established a new Nevada corporation to hold and operate the export/import
operation. The required Contract Social was granted by the Brazilian
government in October 1998, and AMPROMED will soon resume sales of medical
products. In addition to medical supplies, Innovative Medical Services
plans to distribute water filtration products to Brazil through AMPROMED.
The principal terms of the acquisition were forgiveness of certain debt,
assumption of certain ongoing obligations of AMPROMED, and employment
contracts for former principals of the Brazilian company.
Principal Product and its Market
Fillmaster(R) The Fillmaster(R) dispensing apparatus, connected to the
Pharmapure(R) reverse osmosis water filtration system, provides measured
amounts of "Purified Water" as defined by the United States Pharmacopoeia,
("USP") for reconstitution of liquid oral antibiotics and certain other
pharmacy applications. Pharmapure is six-stage water purification unit
featuring an electronic water purity testing module and an auxiliary faucet
for dispensing purified water. Fillmaster is a calibrated volumetric
measuring and dispensing apparatus. The entire system (the "Fillmaster
System") integrates with the building's tap water plumbing, is closed and
pressurized and, according to the Company's testing, has a fill rate at
least three times that of current bottle-and-hose methods - the only know
competition. The Company manufactures, sells and distributes the
Fillmaster dispenser and Pharmapure water system. The end-user installs the
equipment following step-by-step illustrated instructions using common
household tools.
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Historically, pharmacists have either hand-poured water for reconstitution
directly from a bottle into a measuring container and then into the
medicine bottle, or they used a wall-mounted measuring and gravity-flow
dispensing cylinder connected by a system of rubber siphon tubing and pinch
clamps to a water bottle. Traditional methods produce inaccurate
measurements either because two hands are required or because the gravity-fed
system can produce a variable fill rate due to variation in siphon pressure.
Also, prior methods pose the risk of accidental use of "spring" or bottled
"drinking water" due to label similarities, simple mistakes in supply
purchasing, or the pharmacy staff's unawareness of the differences in water
types. Water that does not qualify as "Purified Water" contains minerals
and other impurities that reduce the stability and potency of the
prescription medicine. The use of such water adulterates the medication by
introduction of foreign materials and violates the Federal Food Drug and
Cosmetic Act.
Even when using the intended conforming water, unsealed bottle-and-hose
methods allow bacteria, mold and other airborne contaminants to enter and
grow within the water supply. In addition, the dispensing tips of the other
methods can accumulate residue from the various prescriptions being mixed
and cause cross-contamination of the medications, creating the potential
for serious reactions by the patient.
The Fillmaster dispenser, combined with the Pharmapure water system,
greatly reduces these hazards of contamination in the pharmacy's water
source. The system produces and dispenses "Purified Water", eliminating
the problem of incorrect source. The closed, pressurized system eliminates
the airborne contamination problem, and the rate of filling is increased
dramatically. Finally, cross-contamination of medications is easily
prevented by the Fillmaster dispenser's cleanable and disposable dispensing
tips.
Extensive testing performed by the Company shows that use of the Fillmaster
System saves a pharmacist more than 20 seconds of actual filling time for
each liquid antibiotic prescription. When multiplied by over 12,000
antibiotics per year (on average), the resulting time savings is dramatic.
Coupled with the time savings generated by eliminating water bottle changes
(once for each 28 to 30 prescriptions -- approximately 5 minutes for each
change), use of the Fillmaster System enhances profitability of liquid
antibiotics and multiplies pharmacist time for patient counseling and other
activities.
Direct and indirect costs associated specifically with bottled water are
reduced or eliminated by use of the Fillmaster System. Pharmacy storage
space can be reallocated to more profitable items, and the expense of
bottled water purchases of up to $1.25 for each gallon is replaced by one
annual filter replacement currently costing $65. Under optimum usage, the
cost of "Purified Water" using the Fillmaster System is reduced to
approximately $.04 per gallon.
Based on the Company's surveys of Fillmaster users, customer satisfaction
levels are extremely high. Users agree unanimously that the Fillmaster
System is faster, easier to use, cleaner, and that the elimination of the
aggravation and difficulties associated with all other methods of
reconstitution make the Fillmaster well worth the investment in its
acquisition.
New sales of Fillmaster Systems continue to rise. More significantly,
however, the number of chain pharmacies testing the product continues to
grow. Company records show that more than 85% of pharmacies that test the
Fillmaster place orders within 8 months. The Company has established long-term
agreements with national chain pharmacies to specify installation of
the Fillmaster as standard pharmacy equipment in new and remodeled stores.
The Fillmaster System carries a suggested list price of $659, and the
Company offers discounts for volume purchase agreements.
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There are approximately 72,000 pharmacies in the United States and Canada,
with many thousands more worldwide. Water-mixed antibiotic prescriptions,
for which the Fillmaster is primarily used, make up approximately 12.6% of
a pharmacy's total prescriptions and approximately 25% of a pharmacy's
gross profit.
More than 9,500 Fillmaster systems have been sold to date, and the
Fillmaster is specified as standard equipment for all newly constructed and
remodeled pharmacies at Walgreen's, Wal-Mart, Target, Fred Meyer, Osco,
Jewel, Acme, Lucky, Sav-On, Kroger, Dillon Stores, United Supermarkets,
Phar-Mor, Giant Eagle, Giant Foods, Meijer, City Markets and Eckerd. In
addition, Fillmaster systems have been purchased and are now being used by
such pharmacy chains as Smith's Food and Drug, Longs Drugs, CVS, Rite-Aid,
Drug Emporium, Fry's, Hi-School Pharmacies and Snyders. Also included in
the customer base are many United States Military Clinics, including
Bethesda Naval Hospital; the Kaiser Foundation for Medical Care; the Mayo
Clinic and several hundred Independent and Hospital Pharmacies.
Fillmaster System Filters. The Company also markets unique and proprietary
filter replacements for the Pharmapure water purification system which
require changing at intervals of approximately 9-12 months or whenever
indicated by the purity testing module. The filter replacements represent
a significant continuing source of sales and cash flow to the Company.
Revenues from the replacement filter sales, over a five-year period,
approach the revenue generated by the original sale of the Fillmaster with
much higher profit levels. Thus, Management views the sale of the
Fillmaster as occurring in two distinct stages: immediate and deferred.
The acquisition of a new customer, while generating profit during the
current year, produces a deferred income stream with at least twice as much
gross margin and minimal or no sales expense. In May 1997, the Company
established a program through which chain and independent customers can
automatically be shipped replacement filters annually on the anniversary
date of the system purchase. More than half of the Company's current
customers have signed up for this automatic filter shipment program, and
most new customers subscribe to the program upon purchase of a system.
New Products
Fillmaster(R) 1000e. In August 1997, Innovative Medical Services launched
the Fillmaster(R) 1000e, a fully programmed, computerized dispenser for use
with the Pharmapure water purification system. Designed as an addition to
the Fillmaster dispenser product line, the battery-operated Fillmaster
1000e employs multiple microprocessors to provide accurate and even-flow
dispensing. By using the electronic dispenser, pharmacists increase
prescription integrity by greatly reducing the possibility for human error
while dispensing prescriptions. Full production began in May 1998, and
since June the Company has been selling Fillmaster 1000e dispensers both as
upgrades to existing Fillmaster Systems and as new sales to new customers.
The upgrade list price of the Fillmaster 1000e dispenser is $399, and the
list price for the Fillmaster 1000e electronic dispenser with the
Pharmapure water system is $899. The Fillmaster 1000e was developed with
bar code reading capabilities, and an upgrade scanning module will be
released later this year.
Nutripure(R) Elite
The Nutripure(R) Elite line of residential drinking water systems combines
high-quality reverse osmosis technology with carbon filtration to improve
the taste, smell, quality and safety of standard tap water. Designed for
residential use, Nutripure Elite systems produce at least 150 gallons of
clean, healthy water per month. The Company's drinking water systems
provide the best reverse osmosis technology
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available today at a moderate price, and are therefore strong value
purchases. Incorporating the same filtration technology as the Company's
Fillmaster pharmaceutical water purification system, Nutripure Elite
systems provide healthy, safe and great tasting drinking water.
The Company distributes Nutripure Elite systems through independent
pharmacists, providing them an exclusive health product dealership with a
high profit margin. Gallup polls reflect the public's respect for
pharmacists as ethical and honest professionals, and the Company has based
the marketing of Nutripure Elite systems on both the pharmacist's
reputation and relationship with his customers as well as his testimonial
to the quality of the product as a Fillmaster user. Although the market
for water systems is quite competitive, the pharmacist's recommendation of
a system they use in their pharmacy to reconstitute prescriptions sets
Nutripure apart from all other residential drinking water systems.
Innovative Medical Service's qualitative and quantitative research over the
past year reveals a strong need for independent pharmacists to find
alternative sources to pharmacy revenues. Shrinking margins on medicines
and increased competition from national chains have left the independent,
neighborhood pharmacist scrambling to maintain market share and
profitability. The Company's research shows that independent pharmacists
welcome a drinking water system as an addition to their home health care
product lines and recognize the powerful endorsement they provide for
Nutripure as Fillmaster users.
The Company supports the independent pharmacist dealer network with a
targeted, comprehensive marketing program that includes counter top
displays, consumer brochures and health education materials. The dealer
program provides an opportunity for an independent pharmacist to realize a
significant profit without any investment, start-up or inventory costs. In
addition, the dealer program further distinguishes the independent from the
chain pharmacist.
The Nutripure drinking water system is sold by authorized independent
pharmacists at a retail price of $499 and drop-shipped by the Company
directly to the customer.
Nutripure(R) Elite Filters
The Company also markets unique and proprietary filter replacements for the
Nutripure residential drinking water system that require changing every 9-12
months or whenever indicated by the water quality monitor. The filter
replacements represent a significant continuing source of sales and cash
flow to the Company. Management is confident that future replacement
filter sales will be an ongoing and significant source of income.
Revenues from the replacement filter sales, over a five-year period,
approach the revenue generated by the original sale of the system with much
higher profit levels. Thus, Management views the sale of the system as
occurring in two distinct stages: immediate and deferred. The acquisition
of a new customer, while generating profit during the current year,
produces a deferred income stream with at least twice as much gross margin
and minimal or no sales expense. Nutripure customers are encouraged to
subscribe to the Company's automatic filter shipment program in which the
Company automatically ships replacement filters annually on the anniversary
date of the system purchase.
Nutripure(R) NP2000CT
Innovative Medical Services is proud to announce its entry into the retail
venue with its Nutripure Countertop Water Filtration System (model number
NP2000CT). Nutripure NP2000CT, developed specifically for mass
merchandising, offers excellent water filtration technology at competitive
pricing through a unique marketing approach. Nutripure's professional
one-micron, carbon microfilter removes dirt, chemicals, lead and parasites
to improve the taste, quality and safety of water. Most importantly,
Nutripure is the only filtration system in its class that is pharmacist
recommended. The
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product has been tested and certified by Spectrum Laboratories to meet or
exceed ANSI/NSF standard No. 53 Health Effects and ANSI/NSF Standard No. 42
Aesthetic Effects.
Nutripure NP2000CT features enhancements that position the product to
compete well in the competitive residential water filtration market.
Nutripure NP2000CT contains a high-capacity 2,000-gallon filter that
requires replacement only once a year. Capacities of other leading filters
are much less and therefore require more frequent changing. Also, the
NP2000CT incorporates a unique Automatic Bypass Valve that shuts off after
every use to prevent accidental waste of filtered water. Other countertop
filters may easily be left "on" resulting in the use of filtered water for
dishwashing or other non-consumption uses. The NP2000CT requires no
assembly, and its sealed cartridge design prevents leaking and
contamination because water flows only through the completely sealed filter
cartridge. Other filter systems are designed so that water flows not only
in, but also around the filter cartridge, increasing the potential for
leaking and also increasing the risk of contamination as the consumer must
handle the filter during assembly and replacement processes.
Several national mass merchandisers as well as department and specialty
stores are currently evaluating the Nutripure NP2000CT. Because of its
strong pharmacy tie-in, Nutripure may be marketed as a healthcare product
in the pharmacy department as well as a home product in the general
merchandise department. Trial orders have been placed, and the Company
expects larger orders will be place in the coming year. The NP2000CT will
be competitively priced to retail between $59.00 and $79.99.
Nutripure(R) NP2000CT Replacement Filters
The Company also manufactures and markets replacement filters for the
Nutripure NP2000CT water system. The NP2000CT contains a 2,000-gallon
filter that must be changed every year. Replacement filters will be sold
through retail outlets along with the Nutripure system. The replacement
filters will retail for approximately $25.00 and represent a significant
continuing source of sales and cash flow to the Company.
Medifier(TM)
In July 1997, the Company acquired the Medifier(TM), a unique patented
universal prescription bottle label magnifier. The Medifier holds various
sized prescription bottles in position under a magnifier strip that
enlarges dosage and use instructions to a clearly readable size. The
Company purchased the patent and all rights to manufacture and market the
product from an individual inventor for an aggregate consideration of
$4,000 in cash and 12,000 shares of common stock. The first in a series of
products for the retail pharmacy market, the Medifier will be distributed
through Innovative Medical Services' existing sales channels, as well as
through catalogue sales and promotional products distributors.
Manufacturing
The Fillmaster and Nutripure systems are assembled primarily from custom
manufactured components. It is the Company's goal to perform minor
manufacturing in the Company's facility to minimize wages, equipment
expense and insurance. No components of the systems have permanent or
unequivocally restricted availability. Many manufacturers are available to
produce the components, and a change in suppliers would result in virtually
no lost production.
The original Fillmaster dispenser and the new Fillmaster 1000e dispenser
are both assembled mostly from proprietary and custom parts fabricated to
Company specifications from injection-molded plastic and fabricated
acrylic.
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The Pharmapure purification modules are the major components of each of the
two Fillmaster systems and are purchased under agreements with several
manufacturers that are exclusive with the Company as to Pharmaceutical
uses. While Management regards this particular product as the finest of
its kind, suitable alternative manufacturers exist.
The Nutripure line of water filtration products is also assembled from
proprietary and custom parts manufactured under exclusive agreements with
several different manufacturers. Alternative manufacturers exist, and a
change in suppliers would result in virtually no lost production. There
are no plans to alter production methods.
Research and Development
Research and Development costs that have no alternative future uses are
charged to operations when incurred and are included in operating expenses.
The total amounts charged to Research and Development expense were $177,384
and $64,104 in the fiscal years ended July 31, 1998 and 1997, respectively.
In addition, $29,935 and $73,876 of Research and Development related
equipment purchases were capitalized during fiscal years ended July 31,
1998 and 1997.
The Company's investment in Research and Development during the past year
resulted in the release of four major additions to the Company's product
line, the Fillmaster 1000e and the Nutripure line drinking water systems.
Innovative Medical Services anticipates more new products in the coming
year.
Employees
As of October 27, 1998, the Company employed twenty-three people, nineteen
of whom are full-time individuals whose principal responsibilities are:
product assembly and shipping (four employees), sales, marketing and
customer service (six employees), research and development (three
employees) and administration (six employees). The Company chooses to
outsource more expensive, specialized functions including public relations,
investor relations, graphic design, and selected engineering projects.
Properties
The Company's business operates in a 10,000 square foot facility located in
a light industrial/office park in El Cajon, California. This location
houses all administrative, executive, sales, assembly, shipping and
manufacturing functions for the Company.
The Company's AMPROMED subsidiary leases from an unaffiliated third party
a 39,000 square foot building, including office, warehouse, manufacturing
and showroom facilities in Rio de Janeiro, Brazil.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND OF MANAGEMENT
The following table sets forth the persons known to the Company as
beneficially owning more than five percent (5%) of the outstanding shares
of the Company, the directors and officers and number of shares of the
Company's Common Stock beneficially owned as of February 17, 1999, by
individual directors and executive officers and by all directors and
executive officers of the Company as a group as well as giving effect to
the Shares Offered for the exercise of the Class A Warrants.
Name/Address Title Shares % PreOffrg.(1)
- ------------ ----- ------ --------------
Dennis Atchley Sec. 19,000 0.5%
1725 Gillespie Way
El Cajon, CA 92020
Dennis Brovarone Dir. 17,534 0.4%
11249 W. 103rd Dr.
Westminster, CO 80021
Gary Brownell CFO/Dir 52,334 1.3%
1725 Gillespie Way
El Cajon, CA 92020
Patrick Galuska Dir. 49,334 1.3%
8137 S. Downing St.
Littleton, CO 80122
Michael L. Krall CEO/Pres/Chrman 585,807 15.0%
1725 Gillespie Way
El Cajon, CA 92020
Eugene Peiser Dir. 9,034 0.2%
1725 Gillespie Way
El Cajon, CA 92020
Donna Singer VP/Dir. 80,500 2.1%
1725 Gillespie Way
El Cajon, CA 92020
Off. & Dir. as a Group (7 indiv.) 734,543 20.7%
(1) Percentage stated does not include exercisable options. Effect of
exercisable options is as follows:
Total, Shares and Options % PreOffrg.
------------------------- -----------
Atchley 119,000 3.0%
Brownell 252,534 6.4%
Brovarone 227,334 5.8%
Galuska 199,334 5.1%
Krall 967,057 24.7%
Peiser 159,034 4.1%
Singer 80,500 2.1%
Off/Directors as a Group 2,004,793 51.2%
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MANAGEMENT
The executive officers and directors of the Company and their ages are as
follows:
Held
Name Age Position Position Since
Michael L. Krall 46 President, CEO, Chairman of Bd. 1993
Gary Brownell, CPA 50 CFO, Director. 1996
Dennis Atchley, Esq. 46 Secretary 1996
Eugene Peiser, PD 67 Director 1994
Patrick Galuska 39 Director 1996
Dennis Brovarone 43 Director 1996
Donna Singer 29 Vice President, Director 1998
Business Experience
DENNIS BROVARONE Mr. Brovarone has been practicing corporate and
securities law since 1986 and as a solo practitioner since 1990. He was
elected to the Company's Board of Directors in April, 1996. Since December
1997, Mr. Brovarone has served as the President and Chairman of the Board
of Directors of Ethika Corporation, a publicly held, Mississippi investment
holding company with its office in Westminster, Colorado. From January
1995 to March 1998 Mr. Brovarone served as President (Chairman) of the
Board of Directors of The Community Involved Charter School, a four year
old K-12 public school located in Lakewood, Colorado, operating under an
independent charter and serving approximately 350 students in an
individualized, experiential learning environment. Prior to 1990, Mr.
Brovarone served as in-house counsel to R.B. Marich, Inc., a Denver,
Colorado based brokerage firm. Mr. Brovarone lives and works in
Westminster, Colorado.
GARY W. BROWNELL Mr. Brownell is a Certified Public Accountant in a
private partnership practice. He is the partner in charge of taxes and
municipal audits for his firm. Mr. Brownell graduated from San Diego State
University in 1973 with a Bachelor of Science degree in accounting. He
received his Certified Public Accountant designation in 1983. Mr. Brownell
has been a partner in Brownell and Duffy since 1985.
PATRICK GALUSKA, PE Mr. Galuska is a consulting petroleum engineer in
Denver, Colorado. His practice focuses mainly on the acquisition and
exploitation of underdeveloped oil and gas assets in the Rocky Mountain
area. He is a Registered Professional Engineer and is a member of the
Society of Petroleum Engineers. Mr. Galuska earned his BS degree in
petroleum engineering from the University of Wyoming. He received his MBA
degree in Finance from the University of Denver. Mr. Galuska resides in
Littleton, Colorado with his wife, Laurie and two sons.
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MICHAEL L. KRALL Mr. Krall is the President, CEO and Chairman of the
Board of Directors of Innovative Medical Services, a position he has held
since 1993. He is responsible for the strategic planning, product
development, and day-to-day operations of IMS. Previously, Mr. Krall was
the President and CEO of Bettis-Krall Construction, Inc. a successful
building-development company of custom homes and commercial property in San
Diego County, California. He has also held numerous positions in general
management in the hospitality industry. Mr. Krall attended Pepperdine
University (economics, statistics mechanical engineering). He previously
served 4 years in the United States Marine Corps and was elected, by
general election, to a 4 year term on the Valle de Oro Planning Board. Mr.
Krall lives in El Cajon, California with his wife, Connie and two children.
EUGENE S. PEISER, DOCTOR OF PHARMACY Dr. Peiser has been an independent
consultant to FDA regulated industries since 1974 and a Member of the Board
of Innovative Medical Services since 1994. He graduated from the University
of Tennessee College of Pharmacy with a Bachelor of Science in Pharmacy in
1951 and has received his Doctorate of Pharmacy. Dr. Peiser's consultancy
advises on a wide variety of subjects, including compliance with the
Prescription Drug Marketing Act and other government compliance matters,
employee training and drug repackaging. Dr. Peiser furnishes expert
witness services and has provides approved Pharmaceutical Continuing
Education to several thousand attendees at his seminars. Dr. Peiser is a
Founding Director of the Association of Drug Repackagers; is appointed as
a Registered Arbitrator by the American Registry of Arbitrators; serves as
a member of the Surgeon General's Speakers Bureau; and is President of the
Southwest Chapter of the Association of Military Surgeons. Dr. Peiser lives
and works in Palm Harbor, FL.
DONNA SINGER Ms. Singer has been the Vice President of Operations of
Innovative Medical Services since 1996. As Vice President, Ms. Singer is
responsible for inter-departmental operations, corporate communication and
investor relations and has recently taken charge of the sales and marketing
department. Previously, Ms. Singer served as the investor relations
executive at Western Garnet International, a mining company in Coeur
d'Alene, Idaho that trades on the Toronto Stock Exchange. Ms. Singer
graduated from Gonzaga University in 1992 with a Bachelor of Arts degree in
English and lives with her husband in Lakeside, California.
The Directors serve until their successors are elected by the shareholders.
Vacancies on the Board of Directors may be filled by appointment of the
majority of the continuing directors. The executive officers serve at the
discretion of the Board of Directors except as subject to the employment
agreement with Mr. Krall.
Committees: Meetings of the Board
- ----------------------------------
The Company has a Compensation/Administration Committee and an Audit
Committee. The Compensation/Administration Committee and the Audit
Committee were formed in 1995. Messrs. Brovarone, Galuska and Peiser
comprise the Compensation/Administration Committee and Messrs. Brownell,
Galuska and Peiser, are the Audit Committee. The
Compensation/Administration Committee recommends to the Board the
compensation of executive officers and will serve as the Administrative
Committee for the Company's Stock Option Plans. The Audit Committee serves
as a liaison between the Board and the Company's auditor. The
Compensation/Administration
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Committee met 2 times during the fiscal year ended July 31, 1998, and the
Audit Committee met 2 times during the fiscal year ended July 31, 1998.
The Company's Board of Directors held 4 meetings during the fiscal year
ended July 31, 1998, at which time all the then Directors were present or
consented in writing to the action taken at such meetings. No incumbent
Director attended fewer than 100% of said meetings.
Compliance with Section 16(a) of Securities Exchange Act of 1934
- ----------------------------------------------------------------
To the Company's knowledge, during the fiscal year ended July 31, 1998, the
Company's Officers and Directors complied with all applicable Section 16(a)
filing requirements. This statement is based solely on a review of the
copies of such reports furnished to the Company by its Officers and
Directors and their written representations that such reports accurately
reflect all reportable transactions.
Family Relationships
- --------------------
There is no family relationship between any Director, executive or person
nominated or chosen by the Company to become a Director or executive
officer.
-21-
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows for the fiscal year ending July 31, 1998, the
compensation awarded or paid by the Company to its Chief Executive Officer
and any of the executive officers of the Company whose total salary and
bonus exceeded $100,000 during such year (The "Named Executive Officers"):
Total Annual Cash Compensation
------------------------------ Restricted
Name and Position (Year ended 7/31) ($ Amt.) Stock or Options Granted
- ----------------- ----------------- ------- ------------------------
Michael L. Krall,
Chairman, Pres./CEO 1998 144,000 50,000 options (1)
100,000 options (2)
100,000 options (3)
200,000 options (4)
(1) Five-year Options exercisable August 1997 at $2.00 per share
adopted pursuant to the 1996 Directors and Officers Stock Option
Plan. Subsequently surrendered to the Plan in July 1998.
(2) Five-year Options exercisable May 1998 at $1.00 per share granted
for extraordinary work regarding the EXCOA acquisition adopted
pursuant to 1996 Directors and Officers Stock Option Plan.
(3) Five-year Options exercisable July 1999 at $1.00 per share as
part of option grant to members of the Board of Directors adopted
pursuant to 1998 Directors and Officers Stock Option Plan and
approved by the shareholders in December 1998.
(4) Five-year Options exercisable July 1998 at $.563 per share as
part of options granted to Director for extraordinary work
regarding the EXCOA acquisition adopted pursuant to 1998
Directors and Officers Stock Option Plan and approved by the
shareholders in December 1998.
No other executive officer earned more than $100,000 during the current
fiscal year.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option/Values
The following table sets forth the number and value of the unexercised
options held by each of the Named Executive Officers at July 31, 1998.
None of the Named Executive Officers and Directors who hold unexercised
options exercised options in the fiscal year ended July 31, 1998.
<TABLE>
<CAPTION>
Options Held at Exercise Option Value at
Name and Position July 31, 1998 Price($) July 31, 1998(1)
- ----------------- ------------- -------- ----------------
<S> <C> <C> <C>
Michael L. Krall, Chairman, Pres./CEO 100,000 1.00 N/A
100,000 1.00 N/A
200,000 0.563 $8,400
</TABLE>
(1) Option value based on exercise price and the average closing
price of $0.605 for the 30 days ending July 31, 1998.
Employment Agreements and Executive Compensation
In April, 1996, the Board of Directors approved a five year employment
agreement for Michael Krall, its President. Mr. Krall receives a salary of
$144,000 per year, an amount equal to 3% of the Company's net income before
taxes if any plus other benefits. In April 1996 Mr. Krall was awarded
five year options to acquire 31,250 common shares at $3.20 per share which
were first exercisable in April, 1997.
-22-
<PAGE>
Compensation of Directors
Directors are entitled to receive $300 plus reimbursement for all
out-of-pocket expenses incurred for attendance at Board of Directors meetings.
Other Arrangements
1996 DIRECTORS AND OFFICERS STOCK OPTION PLAN: On April 17, 1996, the
Company's Board of Directors approved a Directors and Officers Stock Option
Plan. The purpose of the Plan is to advance the business and development
of the Company and its shareholders by affording to the Directors and
Officers of the Company who are ineligible to participate in the above
Incentive Stock Option Plan, the opportunity to acquire a propriety
interest in the Company by the grant of Options to acquire shares of the
Company's common stock. The Plan is administered by the entire Board of
Directors. The Plan became effective on April 17, 1996 by the Board of
Directors, was not subject to Shareholder approval and shall terminate on
April 17, 2006. Subject to anti-dilution provisions, the Plan may issue
Options to acquire up to 1,000,000 shares to Directors and Officers. The
maximum number of shares subject to Options granted to any one Director or
Officer shall not exceed 200,000 shares in any 12 month period. The
exercise price for Options shall be set by the Board of Directors but shall
not be for less than eighty-five (85%) of the fair market value per share
on the date of grant. The period in which Options can be exercised shall
be set by the Board of Directors not to exceed five years from the date of
Grant. The Plan may be terminated, modified or amended by the Board of
Directors. Please see the above table for Options granted pursuant to
this Plan.
1998 DIRECTORS AND OFFICERS STOCK OPTION PLAN: On December 19, 1998, the
Company's Shareholders approved the Innovative Medical Services 1998
Officers Directors Stock Option Plan. The purpose of the Plan is to advance
the business and development of the Company and its shareholders by
affording to the Officers and Directors of the Company the opportunity to
acquire a propriety interest in the Company by the grant of Options to
acquire shares of the Company's common stock.
The Options granted are not "Incentive Stock Options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
The issuance of such non-qualified options pursuant to this Plan is not
expected to be a taxable event for recipient until such time that the
recipient elects to exercise the option whereupon the recipient is expected
to recognize income to the extent the market price of the shares exceeds
the exercise price of the option on the date of exercise.
The Plan is administered by an Administrative Committee whom shall
serve a one year term. The Administrative Committee is composed of the
Board's Compensation/Administration Committee. Subject to anti-dilution
provisions, the Plan may issue Options to acquire up to 2,000,000 shares to
Officers and Directors. The Company will not receive any consideration for
the grant of options under the Plan and approximate market value of the
shares to be reserved for the
-23-
<PAGE>
plan is $4,000,000 based upon the average thirty day closing price for the
Company's common stock for the period ending December 31, 1998. The
exercise price for Options shall be set by the Administrative Committee but
shall not be for less than the fair market value of the shares on the date
the Option is granted. Fair market value shall mean the average of the
closing price for ten consecutive trading days at which the Stock is listed
in the NASDAQ quotation system ending on the day prior to the date an
Option is granted. The period in which Options can be exercised shall be
set by the Administrative Committee not to exceed five years from the date
of Grant. Options granted to new executive officers or directors shall
vest one year from date of appointment or election. Shares issuable under
options granted to continuing officers or directors are immediately
exercisable and vest upon exercise. The maximum number of shares subject
to Options granted to any on Director of Officer shall not exceed 200,000
shares in any 12-month period.
The Executive Officers and Directors of the Company are eligible to
participate in the Plan. The Administrative Committee has, subject to
shareholder approval, granted the present Executive Officers and Directors
an option to purchase 100,000 shares of common stock at $1.00 per share.
The Administrative Committee shall grant to individuals newly appointed as
Executive Officers or as Directors, an option to purchase 100,000 shares of
common stock at fair market value. Upon each subsequent anniversary
thereof, each such Officer and Director will receive an option to purchase
50,000 shares of common stock at fair market value. The plan also gives
the Administrative Committee discretion to award additional options. The
aggregate number and kind of shares within the Plan and the rights under
outstanding Options granted hereunder, both as to the number of shares and
Option price, will be adjusted accordingly in the event of a reverse split
in the outstanding shares of the Common Stock of the Company.
The Board may at any time terminate the plan. The approval of the
majority of shareholders is required to increase the total number of shares
subject to the plan, change the manner of determining the option price or
to withdraw the administration of the plan from the Administrative
Committee.
1998 DIRECTORS AND OFFICERS PLAN BENEFITS
Name Position Dollar Value(1) Options Granted(2)
Dennis Atchley Secretary $0.00 100,000
Dennis Brovarone Director $0.00 100,000
Gary Brownell CFO, Director $0.00 100,000
Patrick Galuska Director $0.00 100,000
Michael L. Krall Pres., CEO, Director $0.00 100,000
Eugene Peiser Director $0.00 100,000
Donna Singer Nominee Director $0.00 100,000
Executive Group (5 individuals) $0.00 500,000
Non-Exec. Dir. Grp (2 individuals) $0.00 200,000
(1) Based upon exercise price of $1.00 and the average closing price of
$0.7325 for the thirty days ending October 31, 1998.
-24-
<PAGE>
EMPLOYEE INCENTIVE STOCK OPTION PLAN: On April 17, 1996, the Shareholders
approved the Company's 1996 Incentive Stock Option Plan (the Plan). The
purpose of the Plan is to advance the business and development of the
Company and its shareholders by affording to the key employees of the
Company the opportunity to acquire a propriety interest in the Company by
the grant of Options to acquire shares of the Company's common stock. The
Options granted are "Incentive Stock Options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, for certain key
employees. The Plan is administered by an Administrative Committee whom
shall serve a one year term. Subject to anti-dilution provisions, the Plan
may issue Options to acquire up to 1,000,000 shares to Key Employees. The
maximum number of shares subject to Options granted to any one Key Employee
shall not exceed 100,000 shares. The exercise price for Options shall be
set by the Administrative Committee but shall not be for less than the fair
market value of the shares on the date the Option is granted. The period
in which Options can be exercised shall be set by the Administrative
Committee not to exceed five years from the date of Grant. The Plan may be
terminated, modified or amended by the Board of directors upon the
recommendation of the Administrative Committee. The issuance and exercise
of options pursuant to this Plan are not expected to be taxable events for
recipient until such time that the recipient elects to sell shares received
pursuant to an exercise of the option whereupon the recipient is expected
to recognize income to the extent the market price of the shares exceeds
the exercise price of the option on the date of exercise. All Key
Employees of the Company and its subsidiaries are eligible to participate
in the Incentive Stock Options. A Key Employee is defined in the Plan as
a Company employee who in the judgment of the Administrative Committee has
the ability to positively affect the profitability and economic well-being
of the Company. Part time emploees, independent contractors, consultants
and advisors performing bona fide services to the Company shall be
considered employees for purposes of participation in the Plan. No
Executive Officer or Director of the Company has received options pursuant
to this Plan.
Termination of Employment and Change of Control Arrangement
There is no compensatory plan or arrangement with respect to any individual
named above which results or will result from the resignation, retirement
or any other termination of employment with the Company, or from a change
in the control of the Company.
Transactions with Management
The Company did not enter into any transactions with Management during
the fiscal year ended July 31, 1998.
-25-
<PAGE>
MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
(1) Market Information: The Company's common stock is traded on the NASDAQ
SmallCap Market under the symbol "PURE" and its Class A Warrants are
traded under the symbol "PUREW". The Company's Class Z Warrants are
not listed for trading on any recognized market.
(2) High and Low Bid Prices: The following table sets forth high and low
bid prices for each fiscal quarter, as reported by NASDAQ, for the
last two fiscal years. Such quotations represent inter-dealer prices
without retail mark-ups, mark-downs, or commissions and, accordingly,
may not represent actual transactions.
FISCAL 1998 FISCAL 1997
QUARTER ENDED HIGH LOW QUARTER ENDED HIGH LOW
--------------------------------- --------------------------------
January 31, 1999 4.75 0.93 January 31, 1998 3.22 1.41
October 31, 1998 2.94 1.38 October 31, 1997 7.75 1.88
July 31, 1998 1.34 .044 July 31, 1997 4.38 1.69
April 30, 1998 2.06 1.00 April 30, 1997 4.63 3.50
(3) Security Holders: As of October 27, 1998, the Company had
approximately 920 holders of record of its common stock, 380 holders
of its Class A Warrants and 18 holders of the Company's Class Z
Warrants. This does not include beneficial owners holding common
stock or Class A Warrants in street name. The closing price per share
on October 26, 1998 was $1.00.
(4) Dividend Plans: The Company has paid no common stock cash dividends
and has no current plans to do so.
(5) There are presently 4,392,242 shares of common stock outstanding as of
February 15, 1999.
(6) Preferred Stock: There are no shares of preferred stock presently
outstanding.
-26-
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue up to 20,000,000 shares of its no par
value common stock. Each share is entitled to one vote on matters submitted
to a vote of the shareholders of the Company. There is no cumulative voting
of the common stock. The common stock shares have no redemption provisions
nor any preemptive rights. The Company is also authorized to issue up to
5,000,000 shares of preferred stock, the rights and preferences of which
may be set from time to time prior to issuance by the Board of Directors.
Class A Warrants
Each Class A Warrant entitles the holder to acquire an additional common
share for $5.25 per common share. The Class A Warrants remain exercisable
at the original exercise price until August 8, 2001.
The Class A Warrants are redeemable by the Company for $0.05 per Class A
Warrant provided the closing bid price for the Company's common shares
shall have averaged in excess of $9.00 per share for any twenty (20)
trading days within a period of thirty (30) consecutive business days
ending within five (5) days of the date of a Notice of Redemption. The
Class A Warrants expire on August 8, 2001.
Class Z Warrants: The Class Z Warrants entitle the holder to acquire one
(1) common share at $10 per share. The Class Z Warrants have been
exercisable since August 8, 1998 and expire on August 8, 2001.
PLAN OF DISTRIBUTION
The Company intends to solicit the exercise of the Class A Warrants by
mailing a copy of this prospectus to the registered holders of the Class A
Warrants with instructions on how to deposit the Class A Warrants and the
exercise price with the Warrant Agent, American Securities Transfer &
Trust, Inc., Denver, Colorado. The Company does not intend to engage the
services of any independent parties to solicit the exercise of the Class A
Warrants nor pay any commissions for obtaining the exercise of the Class A
Warrants.
-27-
<PAGE>
SELLING SECURITY HOLDERS
The following Selling Security Holders whose shares have been registered
for public resale under the registration statement which registered the
public offering of the shares underlying the Class A Warrants are set forth
below:
SELLING SECURITIES HOLDER SECURITIES OWNED AND OFFERED
Glen Hall 40,000
Mitchell Kaminsky 117,766
Mathew Kanter 125,000
Neither Mr. Kaminsky nor Mr. Kanter has ever held any position,
office, or other material relationship with the Company.
Mr. Hall holds a 5 year option to acquire the 40,000 shares of common
stock at $0.625 per share granted in consideration of services rendered in
connection with the Company's obtaining a line of credit in September,
1998.
The Selling Security Holders do not own any other securities of the
Company.
SELLING SECURITY HOLDERS PLAN OF DISTRIBUTION
Selling Security Holders may sell or distribute their shares in
transactions through underwriters, brokers, dealers or agents from time to
time or through privately negotiated transactions, including in
distributions to shareholders or partners or other persons affiliated with
the Selling Security Holders.
The distribution of the Selling Security Holders shares may be effected
from time to time in one or more transactions (which may involve crosses or
block transactions) (i) in the over-the-counter
-28-
<PAGE>
market, (ii) in transactions otherwise than in the over-the-counter market
or (iii) through the writing of options on the shares (whether such
options are listed on an options exchange or otherwise). Any of such
transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices. If the Selling Security Holders effects such
transactions by selling the shares to or through underwriters, brokers,
dealers or agents, such underwriters, brokers, dealers or agents may
receive compensation in the form of discounts, concessions or commissions
from the Selling Security Holders or commissions from purchasers of the
shares for whom they may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents might
be in excess of those customary in the types of transactions involved).
Selling Security Holders and any brokers, dealers or agents that
participate in the distribution of the securities might be deemed to be
underwriters, and any profit on the sale of the securities by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents might be deemed to be underwriting discounts and
commissions under the Securities Act. Selling Security Holders may pledge
their shares from time to time in connection with such Selling Security
Holders' financing arrangements. To the extent any such pledgees exercise
their rights to foreclose on any such pledge, and sell the shares, such
pledgees may be deemed underwriters with respect to such shares and sales
by them may be effected under this Prospectus. The Company will not receive
any of the proceeds from the sale of any of the shares by the Selling
Security Holders.
Under the Exchange Act and applicable rules and regulations promulgated
thereunder, any person engaged in a distribution of any of the shares may
not simultaneously engage in market making activities with respect to the
shares for a period, depending upon certain circumstances, of either two
days or nine days prior to the commencement of such distribution. In
addition, and without limiting the foregoing, the Selling Security Holders
will be subject to applicable provisions of the Exchange Act and the rules
and regulations promulgated thereunder, including without limitation Rules
10b-6 and 10b-7, which provisions may limit the timing of purchases and
sales of any of the shares by the Selling Security Holders.
Under the securities laws of certain states, the shares may be sold in such
states only through registered or licensed brokers or dealers. In addition,
in certain states the shares may not be sold unless the shares have been
registered or qualify for sale in such state or an exemption from
registration or qualification is available and is complied with.
TRANSFER AND WARRANT AGENT
The Transfer Agent with respect to the Shares and Class A Warrants and
the Warrant Agent for the exercise of the Class A Warrants is American
Securities Transfer & Trust, Inc., Denver, Colorado.
LEGAL MATTERS
The legality of the Securities of the Company offered will be passed on for
the Company by Dennis Brovarone, Attorney at Law, Westminster, Colorado.
Mr. Brovarone is also a Director of the Company.
-29-
<PAGE>
LEGAL PROCEEDINGS
The following is an update of developments in the previously disclosed
litigation involving the Company filed in the Circuit Court of Pinellas
County, Florida by Zedburn Corporation, against the Company for breach of
contract in October, 1997. The Company has filed counterclaims based upon
the Racketeer Influenced and Corrupt Organization (RICO) Act against Mr.
Reitz, Zedburn Corporation, Capital Development Group, Steven Durland and
other defendants. It is the Company's position that Mr. Reitz and others
perpetrated a scheme to defraud the Company of cash fees and securities in
connection with purported services of arranging a public offering of the
Company's common stock. In October 1997, Mr. Reitz and Zedburn filed for
protection under the Federal bankruptcy laws. In August 1998, Mr. Reitz
voluntarily dismissed his bankruptcy and as a result thereof the Company
has named Mr. Reitz as a defendant to its counterclaims.
The Company believes that the defendants had perpetrated similar schemes
against other parties. The Company believes that it has substantially
completed discovery and complied compelling evidence to prove its claims.
Several of the Defendants filed Motions to Dismiss the Company's
counterclaims. A hearing on the Motions was held on October 1, 1998.
Certain of the Motions were granted pending the Company's amendment of its
Counterclaim. The Company amended its Counterclaims in accordance with
the judge's rulings. Certain Defendants filed second Motions to Dismiss
the amended counterclaims. A hearing on these latest motions is scheduled
for March, 1999. It is the Company's belief that the latest Motions to
Dismiss will be denied and it is the Company's intention to vigorously
pursue a trial in the State Court action as soon as possible.
The Company has neither accrued a liability in its financial statements
regarding this litigation nor disclosed the matter in the footnotes
thereof. The Company has not done so because it does not believe there is
any merit to Mr. Reitz's claims and that the likelihood that the Company
will realize a loss from these matters is believed remote. In addition,
the Company believes that in the unlikely event that the Company settles,
the amount of any such settlement would not be material to the Company's
financial statements.
INDEPENDENT PUBLIC ACCOUNTANT
The balance sheets as of July 31, 1998 and 1997 and the related statements
of income, accumulated deficit, and cash flows for each of the two years in
the period ended July 31, 1997, incorporated by reference in this
prospectus, have been included herein in reliance on the report of Steven
Holland, independent public accountant, given on the authority of that firm
as experts in auditing and accounting.
-30-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors and Stockholders
Innovative Medical Services
El Cajon, California
I have audited the balance sheets of Innovative Medical Services as of July
31, 1998 and July 31, 1997, and the related statements of income,
accumulated deficit, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these financial statements
based on my audits.
I conducted the audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. I believe that my audits
provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Innovative Medical
Services as at July 31, 1998 and July 31, 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ STEVEN HOLLAND
Steven Holland
Certified Public Accountant
San Diego, California
October 23, 1998
-31-
<PAGE>
INNOVATIVE MEDICAL SERVICES
BALANCE SHEETS
- -----------------------------------------------------------------------------
JULY 31
1998 1997
ASSETS --------------------------
Current Assets
Cash and cash equivalents (Note 2) $ 48,250 $ 1,982,660
Restricted cash (Note 3) 206,230 -
Accounts receivable, net of allowance
for doubtful accounts of $17,850
at July 31, 1998 and 1997 276,619 219,047
Notes receivable (Note 4) 106,918 25,930
Inventories 360,566 23,532
Prepaid expenses 11,556 583,333
----------- -----------
Total current assets 1,010,139 2,834,502
----------- -----------
Property, Plant and Equipment
Property, plant and equipment (Note 5) 791,599 685,187
----------- -----------
Total property, plant and equipment 791,599 685,187
----------- -----------
Noncurrent Assets
Deposits 14,075 25,375
Patents 57,806 44,806
Deferred acquisition costs (Note 1 & 15) 1,096,852 45,431
----------- -----------
Total noncurrent assets 1,168,733 115,612
----------- -----------
Total assets $ 2,970,471 $ 3,635,301
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Account payable $ 495,287 $ 91,487
Accrued liabilities 47,060 64,550
Notes payable (Note 6) 294,986 2,721
----------- -----------
Total current liabilities 837,333 158,758
----------- -----------
Long-Term Debt - 257
----------- -----------
Stockholders' Equity
Class A common stock, no par value:
authorized 20,000,000 shares,
issued and outstanding 3,916,351
shares at July 31, 1998 and 3,532,851
shares at July 31, 1997 (Note 9) 6,125,718 5,566,124
Class A warrants: issued and outstanding
3,687,500 warrants (Note 9) 108,750 108,750
Accumulated deficit (4,101,330) (2,198,588)
----------- -----------
Total stockholders' equity 2,133,138 3,476,286
----------- -----------
Total liabilities and stockholders' equity $ 2,970,471 $ 3,635,301
=========== ===========
The accompanying notes are an integral part of the financial statements
-32-
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF INCOME
- -----------------------------------------------------------------------------
FOR THE YEARS ENDED
JULY 31,
1998 1997
--------------------------
Net sales $ 1,675,131 $ 1,024,667
Cost of sales 1,001,999 720,895
----------- -----------
Gross profit 673,132 303,772
----------- -----------
Selling expenses 647,637 447,249
General and administrative expenses 1,789,655 1,356,960
Research and development 177,384 64,104
----------- -----------
Total operating costs 2,614,676 1,868,313
----------- -----------
Operating income (loss) (1,941,544) (1,564,541)
----------- -----------
Other income and (expense):
Interest income 39,602 157,801
Miscellaneous income - 226
----------- -----------
Total other income (expense) 39,602 158,027
----------- -----------
Income (loss) before income taxes (Note 1) (1,901,942) (1,406,514)
Federal and state income taxes 800 800
----------- -----------
Net income (loss) $(1,902,742) $(1,407,314)
=========== ===========
Net (loss) per common share $ (0.50) $ (0.43)
=========== ===========
STATEMENTS OF ACCUMULATED DEFICITS
- -----------------------------------------------------------------------------
FOR THE YEARS ENDED
JULY 31,
1998 1997
--------------------------
Balance, beginning of period $(2,198,588) $ (791,274)
Net income (loss) (1,902,742) (1,407,314)
----------- -----------
Balance, end of period $(4,101,330) $(2,198,588)
=========== ===========
The accompanying notes are an integral part of the financial statements
-33-
<PAGE>
INNOVATIVE MEDICAL SERVICES
STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
FOR THE YEARS ENDED
JULY 31,
1998 1997
--------------------------
Cash flows from operating activities
Net income (loss) $(1,902,742) $(1,407,314)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 125,935 68,843
Amortization - 1,032
Stock issued for services - -
Changes in assets and liabilities:
(Increase) decrease in restricted cash (206,230) -
(Increase) decrease in accounts receivable (57,572) (137,085)
(Increase) decrease in due from officers
and shareholders - 76,887
(Increase) decrease in due from employees - 1,390
(Increase) decrease in notes receivable (80,988) (944)
(Increase) decrease in prepaid expense 571,777 (575,465)
(Increase) decrease in inventory (337,034) 32,128
(Increase) decrease in deferred public
offering costs - 376,695
(Increase) decrease in deposits 11,300 (19,726)
(Increase) decrease in patent costs (13,000) (44,806)
Increase (decrease) in accounts payable 403,800 (12,372)
Increase (decrease) in accrued liabilities (17,490) (371,794)
----------- -----------
Net cash provided (used) by operating
activities (1,502,244) (1,237,031)
----------- -----------
Cash flows from investing activities
Deferred acquisition costs (491,827) (45,431)
Purchase of property, plant and equipment (232,347) (590,624)
----------- -----------
Net cash (used) in investing activities (724,174) (636,054)
----------- -----------
Cash flows from financing activities
Increase (decrease) in notes payable 292,008 (402,154)
Proceeds from sale of warrants - 108,750
Proceeds from sale of common stock - 4,127,443
----------- -----------
Net cash provided by financing
activities 292,008 3,834,039
----------- -----------
Net increase (decrease) in cash and
cash equivalents (1,934,410) 1,960,954
Cash at beginning of period 1,982,660 21,706
----------- -----------
Cash at end of period $ 48,250 $ 1,982,660
=========== ===========
Interest Paid $ 8,243 $ 1,440
Taxes Paid $ 800 $ 800
Non cash investing and financing transactions:
In fiscal years ended July 31, 1998 and 1997 stocks were issued for services
in the amount of $559,594 and $775,500, respectively. The stock issued in
1998 related to acquisition costs.
The accompanying notes are an integral part of the financial statements
-34-
<PAGE>
INNOVATIVE MEDICAL SERVICES
NOTES TO FINANCIAL STATEMENTS
SEE ACCOUNTANTS' REPORT
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
Innovative Medical Services was incorporated in San Diego, California
on August 24, 1992. The Company was organized with the purpose of
manufacturing, marketing, and sales of the Fillmaster, a unique and
proprietary pharmaceutical water purification and dispensing product.
The Company is fully operational, with more than 9,500 customers in all
fifty states, Puerto Rico, The United Kingdom, Australia, Canada, and
Europe. The Company has expanded research and development efforts in
order to further develop its product line to include an additional 10
proprietary pharmacy-related efficiency tools.
Revenue Recognition
The company recognizes revenues when products are delivered.
Research and Development
Research and development costs that have no alternative future uses are
charged to operations when incurred and are included in operating
expenses. The total amount charged to Research and Development expense
was $177,384 and $64,104 in the fiscal years ended July 31, 1998 and
1997, respectively.
Depreciation Method
The cost of property, plant and equipment is depreciated on a
straight-line basis over the estimated useful lives of the related
assets. The useful lives of property, plant, and equipment for purposes
computing depreciation are:
Computers and equipment 7.0 years
Furniture and fixtures 10.0 years
Property held under capital lease 10.0 years
Vehicle 7.0 years
Leasehold improvements are being depreciated over the life of the lease,
which is equal to 120 months.
Depreciation is computed on the Modified Accelerated Cost Recovery
System for tax purposes.
Amortization
The cost of organizational expenses is being amortized on a
straight-line basis over the remaining lives of five (5) years.
Amortization expense charged to general and administrative expense for
the years ended July 31, 1998 and July 31, 1997 was $0 and $1,032,
respectively.
The cost of patents acquired will be amortized on a straight-line basis
over the remaining lives of 17 years beginning in fiscal year ended July
31, 1999.
Inventory Cost Method
Inventories are stated at the lower of cost determined by the Average
Cost method and net realizable value.
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<PAGE>
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The fair value of financial instruments, consisting primarily of the
line of credit, is based on interest rates available to the Company and
comparison to quoted prices. The fair value of these financial
instruments approximates carrying value.
Advertising and promotional Costs
Cost of advertising and promotion are expensed as incurred or the
first-time advertising and promotion takes place. Such costs were
$272,191 and $136,683 for the years ended July 31, 1998 and July 31,
1997, respectively.
Common Stock Public Offering
The Board of Directors authorized the Company to sell up to 1,250,000
shares of the Company's common stock and 1,250,000 Class A warrants in
a public offering pursuant to a Registration Statement on Form SB-2
under the Securities Act of 1933. The board of directors also
authorized obtaining a bridge loan of up to $375,000 to facilitate the
public offering (Note 11).
On August 13, 1996, the Company completed a public offering of its
common stock and Class A warrants. A registration statement covering
that offer was filed with the SEC on August 8, 1996. The IPO price to
was $4.00 per share of the common stock and $0.10 per share on the
warrants. The total proceeds from the IPO were $5,125,000 (1,250,000
shares of common and 1,250,000 Class A Warrants). Each class A warrant
entitles the holder to acquire an additional common share for $5.25 per
common share beginning August 8, 1997 and expiring August 8, 2001. The
Class A Warrants are redeemable by the Company for $0.05 per warrant,
at the Company's option, commencing one year after the effective date
of the offering provided the closing bid price for the Company's common
shares shall have averaged in excess of $9.00 per share for thirty
consecutive business days ending within five days of the date of a
notice of redemption. The net proceeds after deducting the underwriters
fees and other costs was $4,525,625. On September 13, 1996, the
overallottment shares were sold as per the underwriters agreement and
the Company received $476,760 (137,000 shares of common at $4.00 per
share and 137,000 Class A warrants at $0.10 per warrant, less
underwriter's fees and costs).
Deferred Public Offering Cost
The company had incurred $376,695 of costs as of July 31, 1996 related
to an initial public offering. Those costs were deferred, pending
completion of the offering. After the completion of the offering, the
total of the public offering costs $1,436,807 was reclassified to
shareholders' equity.
Deferred Acquisition Costs
During the process of evaluating certain companies for acquisition, the
Company has expended $1,096,852 and $45,430 in fiscal years ended July
31, 1998 and July 31, 1997, respectively. These costs have been
capitalized and will be reclassified if the acquisitions are successful
as a cost of the investment or expensed in the future if the
acquisitions are not successful.
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<PAGE>
Net Loss Per Common Share
The Company adopted FASB Statement No. 128, Earnings Per Share ("SFAS
128"), which is effective for periods ending after December 15, 1997.
Entities that have only common stock outstanding are required to present
basic earnings per share amounts. All other entities are required to
present basic and diluted per share amounts. Diluted per share amounts
assume the conversion, exercise or issuance of all potential common
stock instruments unless the effect is to reduce a loss or increase
the income per common share from continuing operations.
As required by SFAS 128, earnings per share is computed based upon the
weighted average common shares outstanding for the year. Earnings per
share excludes the effect of outstanding warrants and stock options and
the conversion of convertible debt because the effect of their inclusion
would be antidilutive, as defined in the Statement. In conjunction with
SFAS 128, the Company has restated the accompanying financial statements
of July 31, 1997 for all per share data presented.
Following is a reconciliation of the weighted average number of shares
actually outstanding with the number of shares used in the computations
of loss per common share:
For the Years Ended
July 31, 1998 July 31, 1997
------------- -------------
Weighted average number of
shares actually outstanding 3,779,543 3,284,158
Net income (loss) $ (1,902,742) $ (1,407,314)
Net (loss) per common share $ (0.50) $ (0.43)
Potential common stock instruments at July 31, 1998, which include
1,521,250 stock options and 1,798,125 warrants, are not included in
the loss per share calculation because their inclusion would be
antidilutive. Potential common stock instruments at July 31, 1997,
which include 406,250 stock options and 1,798,125 warrants, are not
included in the loss per share calculation because their inclusion
would be antidilutive.
Income Taxes
At July 31, 1998, the Company has financial, federal, and California
tax net operating loss carryforwards of approximately $4,101,000,
$3,994,000, and $2,122,000, respectively. At July 31, 1997, the
Company has financial, federal, and California tax net operating loss
carryforwards of approximately $2,199,000, $2,056,000, and $1,153,000,
respectively. The difference between the financial reporting and the
federal tax loss carryforward is primarily due to the capitalization
of research and development expenses and start-up expenses for tax
purposes with an amortization over five (5) years, however for
financial reporting purposes these expenses are charged to operations
as incurred. The difference between federal and California tax loss
carryforwards is primarily due to the fifty percent limitation on
California loss carryforwards. The tax loss carryforwards will begin
expiring in fiscal year ended July 31, 2009, unless previously
utilized.
The Company adopted Financial Accounting Standards Board Statement No.
109, Accounting for Income Taxes, beginning in fiscal year ended July
31, 1993. The adoption had no impact on 1993 results. In accordance
with this new standard, the Company has recorded total deferred tax
assets of $962,000 and $499,000 and a related valuation reserve of
$962,000 and $499,000 for the fiscal years ended July 31, 1998 and
1997, respectively. Realization of these deferred tax assets, which
relate to operating loss carryforwards and timing differences from the
amortization of research and development expenses and start-up
expenses, is dependent on
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<PAGE>
future earnings. The timing and amount of future earnings are
uncertain and therefore, the valuation reserve has been established.
NOTE 2. CASH AND CASH EQUIVALENTS
At July 31, 1997 cash equivalents represented cash deposited in the
Merrill Lynch Institutional Fund. This fund invests in securities
with maturities of 270 days or less and includes US Treasury
instruments and other government securities and commercial paper of
large public companies. Innovative Medical Services receives interest
income from the fund. This cash can be withdrawn upon giving 24 hours
notice. The total cash deposited in this fund at July 31, 1997 was
$1,903,327. The carrying amounts for cash and cash equivalents
approximate fair value because of the short maturity of these
instruments. The Company maintains cash balances at several financial
institutions. Accounts at each institution, other than Merrill Lynch,
are insured by the Federal Deposit Insurance Corporation up to
$100,000. At July 31, 1997, the Company's uninsured cash equivalent
balances total $1,922,714.
At July 31, 1998, the Company's cash and cash equivalents is
represented by $48,250 in cash or checking accounts.
NOTE 3. RESTRICTED CASH
At July 31, 1998, the Company's restricted cash consisted of a
certificate of deposit of $206,229. The certificate of deposit is held
by a bank, as security for a line of credit with the same bank.
NOTE 4. NOTES RECEIVABLE
At July 31, 1998, notes receivable of $80,074 represents amounts due
from officers and $26,844 represent amounts due from employees. At
July 31, 1997, notes receivable of $25,930 represents amounts due from
employees. All notes receivable are due and payable within one year.
The carrying value of the notes, based on the terms at which those
same loans would be made currently, approximate their fair value.
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant, and equipment - at
cost, less accumulated depreciation:
July 31, 1998 July 31, 1997
------------- -------------
Computers and equipment $ 628,074 $ 402,906
Furniture and fixtures 86,487 80,530
Property held under capital lease 7,511 7,511
Vehicle 40,670 40,670
Leasehold improvements 280,575 279,353
----------- -----------
1,043,317 810,970
Less: accumulated depreciation 251,718 125,783
----------- -----------
Total $ 791,599 $ 685,187
=========== ===========
Depreciation expense charged to general and administrative expense for
the years ended July 31, 1998 and 1997 was $125,935 and $68,843,
respectively.
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<PAGE>
NOTE 6. DEBT
The details relating to debt are as follows:
July 31, 1998 July 31, 1997
------------- -------------
Obligation under capital lease $ 969 $ 2,978
Line of Credit Valle de Oro Bank,
$ 200,000 line of credit,
Interest at 7.7% due and payable
February 25, 1999
Secured by certificate of
deposit of $ 206,230 199,483 0
Line of Credit Flagship Capital, Inc.
for financing of accounts
payable, interest at 17% payable
at $27,052 monthly beginning
September 13, 1998 94,533 0
----------- -----------
Total notes payable 294,985 2,978
Less: Current maturities of
notes payable included in
current liabilities 294,985 2,721
----------- -----------
Total long term debt $ 0 $ 257
=========== ===========
NOTE 7. CAPITAL LEASE
The company is the lessee of a display booth under a capital lease
expiring in August of 1998. The asset and liability under the capital
lease is recorded at the lower of the present values of the minimum
lease payments or the fair market value of the asset. The asset is
amortized over the estimated useful life of ten years. Depreciation
of the asset under capital lease charged to expense in the year ended
July 31, 1998 and 1997 was $751 and $751, respectively. The monthly
lease payment, which began in September 1995, is $262. At July
31,1998 the remaining lease is represented by 2 payments of $262 plus
a buyout of $407. The interest rate on the capital lease is
approximately 23.6%.
NOTE 8. COMMITMENTS
The company leased office and warehouse facilities under an operating
lease that expired on December 31, 1996. On May 14, 1996, the Company
entered into a new operating lease agreement for sixty-five months
commencing on July 1, 1996. The rent payment portion of the lease
will be for sixty-three months, which allows for an initial building
improvement period of two months. The monthly rental for the 9,443
square foot facility will be $ .61 per square foot plus $ .08 per
square foot for maintenance of common areas. There is also a fixed
yearly increase of 4%. The company has also signed an amendment to
the lease to allow for an option to lease the building for an
additional five years. The company made improvements to the new
building in the amount of $280,000.
The rental expense recorded in general and administrative expenses for
the years ended July 31, 1998 and July 31, 1997 was $ 76,400 and $
70,423, respectively. Future minimum rental payments required for
each of the 5 succeeding years are as follows:
Year Ended July 31, 1998 Amount
1999 $ 81,756
2000 85,026
2001 88,428
2002 16,277
2003 0
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NOTE 9. CAPITAL STOCK
The following schedule summarizes the change in capital stock:
<TABLE>
<CAPTION>
Common Common
Stock Stock A Warrants A Warrants Z Warrants
Shares $ Issued $ Issued
-------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, July 31, 1995 1,791,851 591,961 0 0 0
Sale of Stock 37,000 22,220 0 0 0
Stock issued for services 5,000 5,000 0 0 0
Contribution of officers wages 0 44,000 0 0 0
Balance, July 31, 1996 1,833,851 663,181 0 0 0
Bridge loan holders 0 0 2,250,000 0 750,000
Sale of stock (net of costs) 1,387,000 4,127,443 1,437,500 108,750 0
Stock issued for services 312,000 775,500 0 0 35,000
Balance, July 31, 1997 3,532,851 5,566,124 3,687,500 108,750 785,000
Stock issued for services 383,500 559,594 0 0 0
Balance, July 31, 1998 3,916,351 6,125,718 3,687,500 108,750 785,000
</TABLE>
On May 4, 1994, the Shareholders voted to increase authorized common
stock from 100,000 to 5,000,000 shares. On November 22, 1993, the
Board of Directors authorized a stock split for shareholders of record
of September 30, 1993, thereby increasing the number of issued and
outstanding shares to 2,117,520.
On April 17, 1996, the Board of Directors approved a 2 for 3 reverse
stock split of the common stock of the founding shareholders of the
corporation, thus reducing the outstanding shares. Also, the board
authorized the issuance of two classes of shares, to be designated
respectively as "Common shares" and "Preferred shares". The total
number of authorized common shares of the corporation was increased
from 5,000,000 shares to 20,000,000 shares, with no par value. The
total number of authorized preferred shares of the corporation was
increased from 1,000,000 shares to 5,000,000 shares, with no par
value. All references in the accompanying financial statements to the
number of common shares and per-share amounts have been restated to
reflect the stock splits.
NOTE 10. RELATED PARTY TRANSACTIONS
On April 1, 1996, the Company entered into an employment agreement
with the President and Chief Executive Officer. The term of the
agreement is for five years with an automatic renewal of another five
years. The following are the major provisions of the agreement:
1. Compensation -
a. Salary of $108,000 per year, and
b. Additional compensation equal to 3% of the net income
before taxes earned by the corporation during each full
fiscal year, and
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c. A monthly amount of not more than $500 per month for a
auto lease, and
d. A five year option to purchase as many shares of the
corporation's common stock as equals one hundred
thousand dollars at 80% of the initial public offering
price of the Company's common stock, approximately
31,250 shares at $3.20 per share, which are exercisable
in April, 1997.
2. Compensation for past services -
In consideration of services which have been rendered
during the fiscal years ended July 31, 1994 and July
31, 1995 and the eight months period ended March 31,
1996, the corporation granted the following
compensation for past services rendered:
a. $30,000 for fiscal year ended July 31, 1994, and
b. $45,000 for fiscal year ended July 31, 1995, and
c. $60,000 for the eight months ended March 31, 1996.
The President (Mr. Krall) waived the payment of $119,000 of the
compensation for past services and contributed this amount as an
additional payment for the common stock he presently owns. In order
to reward the efforts of Director Krall for his outstanding
performance in the weeks leading to NASDAQ approval of the initial
public offering, the Compensation Committee recommended and the Board
of Directors authorized a bonus to Mr. Krall in the amount of $
257,500. The bonus of $257,500 was accrued at July 31, 1996.
On April 26, 1997, the board of directors approved the renewal of the
employment contract for Michael Krall for the position of President
and Chief Executive Officer and also increased his salary to $12,000
per month.
NOTE 11. STOCK OPTION PLANS
On April 17, 1996, the Board of Directors and the shareholders
approved a stock option plan for the key employees of the Company and
non-employee Directors of the Company. Under the plan the number of
shares of stock which may be issued and sold shall not exceed
1,000,000 shares, with 900,000 shares reserved for issuance to key
employees pursuant to their Incentive Stock Options and 100,000 shares
reserved for issuance to non-employee Directors pursuant to their
non-statutory options. The per share option shall be determined by
fair market value of the stock on the date the option is granted. No
person shall receive options, first exercisable during any single
calendar year for stock, the fair market value of which exceeds
$100,000.
On April 26, 1997, the Board of Directors approved the option to
purchase 25,000 shares for the Vice President, Sales and Marketing as
part of the ISOP plan. It was also agreed to award stock options of
up to 300,000 shares from the ISOP to current and future employees at
or above the market price at the time of the grant.
On April 17, 1996, the Board of Directors approved a stock option plan
for the executive officers and Directors of the Company. Under the
plan the maximum number of shares of stock which may be issued and sold
shall not exceed 1,000,000 shares, with the maximum number of shares
for which an option may be granted to any one Director or officer shall
be 100,000. The per share option price for the stock subject to each
option shall be $1.00 per share or such other price as the Board of
Directors may determine.
Also, on April 17, 1996, the Board of Directors approved the issuance
of 2,500 shares to each of two retiring board members for past
services.
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<PAGE>
On September 20, 1996, the Board of Directors approved, subject to
underwriter's approval, an offer to all Directors and Executive
Officers, the option of purchasing up to 50,000 shares of the
corporations stock at $4.00 per share. The option would be for a
period of five years with the underlying shares registered with the
SEC on Form S-8. On November 12, 1997, the Board of Directors and
officers agreed to forfeit their options to purchase shares at $4.00
per share.
On August 6, 1997, the Board of Directors authorized options to
purchase 50,000 shares be issued $2.00 per share to each of the Board
of Directors pursuant to the Directors and Officers 1996 Stock Option
Plan.
On July 15, 1998, the Board of Directors authorized options to
purchase 50,000 shares be issued at $1.00 per share to each of the
Board of Directors pursuant to the Directors and Officers 1996 Stock
Option Plan.
On July 15, 1998, the Board of Directors also authorized 360,000
options to purchase shares at $0.563 per share to members of the Board
of Directors that worked directly on the EXCOA acquisition, pursuant
to the Directors and Officers 1996 Stock Option Plan.
NOTE 12. BRIDGE FINANCING
In May 1996, the Company offered in a private placement 15 Bridge Loan
Units each originally consisting of one $25,000 secured promissory
note, 50,000 common shares, 50,000 Class A Bridge Warrants to acquire
one common share at $5.25 and 50,000 Class Z Warrants to acquire one
common share at $10.00 per share. On August 1, 1996 the Company
renegotiated the terms of the Bridge Financing with the investors
therein in order to address concerns of The NASDAQ SmallCap Market as
to the potential return to these investors. As a result, the Bridge
Financing investors agreed to the cancellation of the 50,000 common
shares per the Bridge Loan Unit (750,000 common shares in total) and
an increase of 100,000 Class A Warrants per Bridge Loan Unit
(1,500,000 additional Class A Warrants in total). As a result, the
Bridge Financing investors have been issued a total 2,250,000 Class A
warrants and 750,000 Class Z Warrants. In addition, the Bridge
Financing investors have each agreed to an irrevocable and complete
restriction on the transfer of each investor's Class A Warrants for a
six-month period from August 8, 1996. The promissory notes bear
interest at the rate of (5%) five percent and are due and payable on
the earlier of the closing of the public offering or October 26, 1996.
The Bridge Loan promissory notes are secured by substantially all of
the assets of the Company and a personal guaranty granted by Michael
Krall, the Company's president. The Class A and Class Z Warrants
cannot be exercised for one year and two years, respectively, and both
expire in August 2001. The Company will receive the exercise price of
the Bridge Loan Unit warrants, but will not receive any proceeds from
any sale of the Bridge Loan Unit warrants or the shares underlying the
warrants. The net proceeds to the Company from the issuance of the
promissory notes was $292,150, after payment of $82,850 for public
offering costs.
The Bridge Financing and the public offering may be deemed integrated
together and as a result, the Bridge Financing may have been in
violation of the registration requirements of Section 5 of the
Securities Act of 1933. This results in a contingent liability for
the purchase price of the securities sold in violation of section 5 in
the amount of $375,000 as well as other damages and litigation cost.
The Company is already contractually bound to repay the entire
consideration given for the Bridge Financing Units. No assurance can
be given that this contingent liability will not have a material
adverse effect upon the Company or its operations. On August 16,
1996, after the closing of the initial public offering, all Bridge
loans were repaid with interest.
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<PAGE>
NOTE 13. PENSION PLAN
The Company participates in a Small SEP program under which the
employer makes contributions to a SEP, which includes a salary
reduction arrangement (SARSEP). Employees who participate in the
SARSEP may elect to have the employer: (a) make contributions to the
SEP on their behalf, or (b) pay them cash. A salary reduction
arrangement may be used only in years in which the SEP meets
requirements that the IRS may impose to ensure distribution of excess
contributions. Annual contributions of an employer under a SEP are
excluded from the participant's gross income.
NOTE 14. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company markets its products to numerous customers in various
geographic regions, thereby spreading its credit risk related to
receivables. See Note 2 Cash and Cash Equivalents as to the
discussion of credit risks concerning cash equivalents.
The carrying amounts for cash and cash equivalents, receivables, and
payables approximate fair value because of the short maturity,
generally less than three months, of these instruments. The carrying
value of the Company's long-term debt approximates fair value since
the current borrowing rates available for financing are similar in
terms.
NOTE 15. SUBSEQUENT EVENTS
After July 31, 1998 the Company has purchased the assets of Export
Company of America, Inc. (EXCOA), a privately held Fort Lauderdale,
Florida-based distributor of disposable medical, dental and veterinary
supplies. The major asset of this company was its 45% interest in
Ampromed Comercio Importacao E Exportacao Ltda (AMPROMED), a Rio de
Janeiro-based import company that sells medical, dental and veterinary
supplies and water filtration products to practitioners, retail
outlets and government agencies. The Company has acquired the
remaining 55% interest in AMPROMED from a private individual. To
facilitate this transaction the Company has formed EXCOA Nevada, a
100% owned subsidiary of Innovative Medical Services. This company
was incorporated in Nevada. A 99% interest in AMPROMED will be held
by EXCOA Nevada, with the remaining 1% of AMPROMED being owned by
Innovative Medical Services. The final documents needed for
AMPROMED to conduct business in Brazil under its new ownership were
executed on October 16, 1998. The Company has incurred $1,051,422 of
acquisition costs as of July 31, 1998 for these two entities plus an
additional $39,900 incurred after the balance sheet date. At July 31,
1998 $514,594 of the acquisition costs incurred relate to the issuance
of stock for services. These business combinations occurred after
July 31, 1998 and will be accounted for using the purchase method.
NOTE 16. YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures
due to processing errors potentially arising from calculations using
Year 2000 date are a known risk. The Company is addressing this risk
to the availability and integrity of financial systems and the
reliability of operational systems even though the newly acquired in-
house software system is Year 2000 compliant. The Company has
established processes for evaluating and managing the risks and costs
associated with this problem. The Company is also communicating with
suppliers, dealers, financial institutions and others with which it
does business to ensure their systems will be Year 2000 compliant.
The cost of compliance will be incurred through fiscal year ended
July 31, 1999.
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<PAGE>
INNOVATIVE MEDICAL SERVICES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
(UNAUDITED)
OCTOBER 31 JULY 31
1998 1998
---------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 41,567 $ 48,250
Restricted cash 204,722 206,230
Accounts receivable, net of allowance
for doubtful accounts of $17,850 637,037 276,619
Notes receivable 123,428 106,918
Inventories 525,341 360,566
Prepaid expenses 10,526 11,556
----------- -----------
Total current assets 1,542,620 1,010,139
----------- -----------
Property, Plant and Equipment
Property, plant and equipment 810,079 791,599
----------- -----------
Total property, plant and equipment 810,079 791,599
----------- -----------
Noncurrent Assets
Deposits 17,075 14,075
Patents and licenses 405,077 57,806
Goodwill 261,322 -
Other intangible assets 360,000 -
Deferred acquisition costs 45,430 1,096,852
----------- -----------
Total noncurrent assets 1,088,904 1,168,733
----------- -----------
Total assets $ 3,441,603 $ 2,970,471
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 656,458 $ 495,287
Accrued liabilities 5,647 47,060
Notes payable 508,620 294,986
----------- -----------
Total current liabilities 1,170,724 837,333
----------- -----------
Long-Term Debt - -
----------- -----------
Stockholders' Equity
Class A common stock, no par value:
authorized 20,000,000 shares, issued
and outstanding 3,916,351 6,125,718 6,125,718
Class A warrants: issued and outstanding
3,687,500 warrants 108,750 108,750
Accumulated deficit (3,963,589) (4,101,330)
----------- -----------
Total stockholders' equity 2,270,879 2,133,138
----------- -----------
Total liabilities and stockholders' equity $ 3,441,603 $ 2,970,471
=========== ===========
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<PAGE>
INNOVATIVE MEDICAL SERVICES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- -----------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
OCTOBER 31,
1998 1997
---------------------------
Net sales $ 795,519 $ 435,259
Cost of sales 282,289 248,418
----------- -----------
Gross profit 513,230 186,841
----------- -----------
Selling expenses 71,306 152,463
General and administrative expenses 268,638 389,199
Research and development 38,037 53,265
----------- -----------
Total operating costs 377,982 594,927
----------- -----------
Operating income (loss) 135,248 (408,086)
----------- -----------
Other income and (expense)
Interest income 2,693 -
Miscellaneous income - 21,709
----------- -----------
Total other income (expense) 2,693 21,709
----------- -----------
Income (loss) before income taxes 137,941 (386,377)
Federal and state income taxes 200 200
----------- -----------
Net income (loss) $ 137,741 $ (386,577)
=========== ===========
Net income per common share (primary) $ 0.04 $ (0.11)
=========== ===========
Net income per common share (fully diluted) $ 0.02 $ (0.07)
=========== ===========
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS
- -----------------------------------------------------------------------------
(UNAUDITED)
THREE MONTHS
ENDED YEAR ENDED
OCTOBER 31 JULY 31
1998 1998
---------------------------
Balance, beginning of period $(4,101,330) $(2,198,588)
Net income (loss) 137,741 (1,902,742)
----------- -----------
Balance, end of period $(3,963,589) $(4,101,330)
=========== ===========
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INNOVATIVE MEDICAL SERVICES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -----------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
OCTOBER 31,
1998 1997
--------------------------
Cash flows from operating activities
Net income (loss) $ 137,741 $ (386,577)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 35,786 27,542
Changes in assets and liabilities:
(Increase) decrease in restricted cash 1,507 -
(Increase) decrease in accounts
receivable (360,418) (204,059)
(Increase) decrease in notes receivable (16,510) (130,105)
(Increase) decrease in prepaid expense 1,030 32,568
(Increase) decrease in inventory (164,775) (43,005)
(Increase) decrease in deposits (3,000) -
(Increase) decrease in patents and
licenses (347,271) -
(Increase) decrease in deferred
acquisition costs 1,051,422 (21,069)
Increase (decrease) in accounts payable 161,171 123,507
Increase (decrease) in accrued liabilities (41,413) (33,163)
----------- -----------
Net cash provided (used) by operating
activities 455,269 (634,361)
----------- -----------
Cash flows from investing activities
Goodwill (261,322) -
Other intangible assets (360,000) -
Purchase of property, plant and equipment (54,266) (70,215)
----------- -----------
Net cash (used) in investing
activities (675,588) (70,215)
----------- -----------
Cash flows from financing activities
Increase (decrease) in notes payable 213,634 (792)
----------- -----------
Net cash provided by financing
activities 213,634 (792)
----------- -----------
Net increase (decrease) in cash and
cash equivalents (6,683) (705,368)
Cash and cash equivalents at beginning of period 48,250 1,982,660
----------- -----------
Cash and cash equivalents at end of period $ 41,567 $ 1,277,292
=========== ===========
Interest Paid $ 9,797 $ 120
-47-
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN
OR MADE SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SHARES UNDERLYING THE CLASS A WARRANTS OFFERED BY THIS PROSPECTUS OR AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES AND THE CLASS
A WARRANTS IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION.
TABLE OF CONTENTS
Prospectus Summary
Risk Factors
Use of Proceeds
Capitalization
Management's Discussion and Analysis
of Financial Condition
The Company and its Business.
Management
Security Ownership of Management and
Principal Shareholders
Market for the Company's Common Stock
and Related Stockholder Matters
Certain Transactions
Description of Securities
Selling Securities Holders
Plan of Distribution
Transfer and Warrant Agent
Legal Matters/Legal Proceedings
Independent Public Accountant
Financial Statements
UNTIL ______, 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS.
INNOVATIVE MEDICAL SERVICES
LOGO
-------------------------
PROSPECTUS
-------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The only statute, charter provision, bylaw, contract, or other arrangement
under which any controlling persons, director or officer of the Registrant
is insured or indemnified in any manner against any liability which he may
incur in his capacity as such, is as follows:
(a) The Company's Certificate of Incorporation provides the Company's
Officers and Directors the full extent of the protection offered by the
General Corporation Law of the State of California.
(b) The General Corporation Law of the State of California provides that a
corporation may include a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for
any breach of the directors' duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under the
Corporation Law dealing with the liability of directors for unlawful
payment of dividend or unlawful stock purchase or redemption, or (iv) for
any transaction from which the director derived an improper personal
benefit. No such provision shall eliminate or limit the liability of a
director for any act or omission occurring prior to the date when such
provision becomes effective.
(c) The Company's Bylaws provide that the Company may indemnify its
Officers and Directors to the full extent permitted by the General
Corporation Law of the State of California.
(d) The General Corporation Law of the State of California provides that a
corporation may indemnify its directors and officers against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and incurred by them in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the rights
of the corporation), by reason of being or having been directors or
officers, if such directors or officers acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, they
had no reasonable cause to believe their conduct was unlawful. The
indemnification provided the General Corporation Law of the State of
California is not exclusive of any other rights arising under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the offering, all of which are to be borne by the
Registrant, are as follows:
SEC Filing Fee na
NASD Filing Fee na
Printing and Advertising Expenses 10,000
Accounting Fees and Expenses 1,000
Legal Fees and Expenses 25,000
Blue Sky Fees and Expenses 5,000
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant sold securities which were not
registered under the Securities Act of 1933, as amended, as follows:
COMMON TOTAL
NAME OF PURCHASER DATE STOCK CONSIDERATION
Robert Abrigo. 04/17/96 2,500 services
Thomas Smith, Sr. 04/17/96 2,500 services
Frederick Hirth 09/17/97 12,000 property (1)
(1) Issued in consideration of the assignment of the Medifier patent
BRIDGE FINANCING INVESTORS
BRIDGE FINANCING
NAME OF PURCHASER DATE UNITS(2) CONSIDERATION
- ----------------- ---- ---------------- -------------
Janice Mastropiero 04/25/96 0.5 $12,500
Sheri Ann Lopa. 04/25/96 0.5 $12,500
Anthony Stropoli 05/04/96 1.0 $25,000
Sandra A. Wood 04/24/96 1.0 $25,000
Joseph Burtone 05/15/96 0.5 $12,500
Natalie Sotiriou 04/25/96 0.5 $12,500
Tom Coccio 05/02/96 0.5 $12,500
Joerg Wiedenhoff. 04/26/96 1.0 $25,000
Manfred Rau 04/25/96 1.0 $25,000
Norbert Schroeder 04/26/96 1.0 $25,000
Dagmar Deitermann-Schwark 04/24/96 1.0 $25,000
Kenneth S. Briggs 05/15/96 1.5 $25,000
Dennis Giordano 05/22/96 0.5 $12,500
Gregory Tominia 05/23/96 1.0 $25,000
John R. Serpico 04/24/96 1.5 $37,500
The Paris Group, Ltd. 05/15/96 0.5 $12,500
JLE Construction, Inc. 05/15/96 1.5 $37,500
(1) In May 1996, the Company offered in a private placement 15 Bridge Loan
Units each originally consisting of one $25,000 secured promissory note,
50,000 common shares, 50,000 Class A Warrants to acquire one common share
at $5.25 and 50,000 Class Z Warrants to acquire one common share at $10.00
per share. On August 1, 1996, the Company renegotiated the terms of the
Bridge Financing with the investors therein in order to address concerns
of The Nasdaq SmallCap Market as to the potential return to these
investors. As a result, the Bridge Financing investors have agreed to the
cancellation of the 50,000 common shares per Bridge Loan Unit (750,000
common shares in total) and an increase of 100,000 Class A Warrants per
Bridge Loan Unit (1,500,000 additional Class A Warrants in total).
II-2
<PAGE>
CERTAIN OPTION HOLDERS
# OF UNDERLYING
NAME OF OPTIONEE DATE COMMON STOCK CONSIDERATION
Glenn Hall 08/03/98 40,000 Services (1)
Minneapolis Company 11/16/98 300,000 Services (2)
(1) 5 year options to acquire common stock at $0.625 per share granted in
consideration of services rendered in connection with the Company's
obtaining a line of credit.
(2) Options to acquire common stock at $1.1875 per share granted in
consideration of investment banking services to be rendered. In February
1999, the Minneapolis Company surrendered the options in consideration of
the Registrant's agreement to terminate the investment banking agreement.
JANUARY 1999 PRIVATE PLACEMENT
COMMON TOTAL
NAME OF PURCHASER DATE STOCK CONSIDERATION
Mitchell Kaminsky 01/29/99 117,766 175,000
Mathew Kanter 01/29/99 125,000 185,750
With respect to the sales made, the Company or its affiliates relied on
Section 4(2) of the Securities Act of 1933, as amended. No advertising or
general solicitation was employed in offering the securities. The
securities were offered to officers and directors who had access to
information by virtue of their relationship as officers and directors of
the Company or to persons with a prior business or family relationship with
officers and directors of the Company. The securities were offered for
investment only and not for the purpose of resale or distribution, and the
transfer thereof was appropriately restricted by the Company.
II-3
<PAGE>
ITEM 27. EXHIBITS.
The following Exhibits are filed as part of this Registration Statement
pursuant to Item 601 of Regulation S-B:
*3.1 -- Articles of Incorporation, Articles of Amendment and Bylaws
*4.1 -- Form of Class A Warrant
*4.2 -- Form of Class Z Warrant
*4.3 -- Form of Common Stock Certificate
*4.4 -- Warrant Agreement
5.1 -- Opinion of Dennis Brovarone, Attorney at Law,
*10.1 -- Employment Contract/Michael L. Krall
23.1 -- Consent of Dennis Brovarone, Attorney at Law (see opinion)
23.2 -- Consent of Steven Holland, Certified Public Accountant
27.1 -- Financial Data Schedule
* Previously Filed
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
II-4
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933 as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all the requirements for filing on Form SB-2 and authorized
this Registration Statement to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of El Cajon, State of California on
February 16, 1999.
INNOVATIVE MEDICAL SERVICES
By: /s/ MICHAEL L. KRALL
- --------------------------------
Michael L. Krall
Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following
persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE
/s/ MICHAEL L. KRALL President, Chief Executive February 16, 1999
- ----------------------- Officer and Director
Michael L. Krall
/s/ GARY BROWNELL Chief Financial Officer, February 16, 1999
- ----------------------- Director
Gary Brownell
/s/ EUGENE PEISER, PD Director February 16, 1999
- -----------------------
Eugene Peiser, PD
/s/ PATRICK GALUSKA Director February 16, 1999
- -----------------------
Patrick Galuska
/s/ DENNIS BROVARONE Director February 16, 1999
- -----------------------
Dennis Brovarone
/s/ DONNA SINGER Director February 16, 1999
- -----------------------
Donna Singer
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
*3.1 -- Articles of Incorporation, Articles of Amendment and Bylaws.
*4.1 -- Form of Class A Warrant.
*4.2 -- Form of Class Z Warrant
*4.3 -- Form of Common Stock Certificate
*4.4 -- Warrant Agreement
5.1 -- Opinion of Dennis Brovarone, Attorney at Law
23.1 -- Consent of Dennis Brovarone, Attorney at Law
23.2 -- Consent of Steven Holland, Certified Public Accountant
27.1 -- Financial data schedule
* Previously Filed
EXHIBIT 5.1
DENNIS BROVARONE
ATTORNEY AND COUNSELOR AT LAW
11249 West 103rd Drive
Westminster, Colorado 80021
phone: 303 466 4092 / fax: 303 466 4826
February 23, 1999
Board of Directors
Innovative Medical Services
Re: Registration Statement on Form SB-2
-----------------------------------
Gentlemen:
You have requested my opinion as to the legality of the issuance by
Innovative Medical Services, (the "Corporation") of up to 3,687,500 shares
of Common Stock pursuant to the exercise of Class A Warrants, and of the
432,766 shares being offered by certain selling securities holders (the
"Shares"). The Shares are the subject of a Registration Statement on Form
SB-2(the "Registration Statement") to be filed on or before February 23,
1999.
Pursuant to your request I have reviewed and examined:(1).The Articles
of Incorporation of the Corporation, as amended (the "Articles"); (2). The
Bylaws of the Corporation, as certified by the Secretary of the
Corporation; (3). The minute book of the Corporation; (4). A copy of
certain resolutions of the Board of Directors of the Corporation; (5). The
Registration Statement; (6) and (7).Such other matters as I have deemed
relevant in order to form my opinion.
Based upon the foregoing, and subject to the qualifications set forth
below, I am of the opinion that the Shares, if issued as described in the
Registration Statement will have been duly authorized, legally issued,
fully paid and non-assessable.
This opinion is furnished by me as counsel to the Corporation and is
solely for your benefit. Neither this opinion nor copies hereof may be
relied upon by, delivered to, or quoted in whole or in part to any
governmental agency or other person without our prior written consent. My
opinion is subject to the qualification that no opinion is expressed herein
as to the application of state securities or Blue Sky laws.
Not withstanding the above, I consent to the use of this opinion in the
Registration Statement. In giving my consent, I do not admit that I come
without the category of persons whose consent is required under Section 7
of the Securities and Exchange Commission promulgated thereunder.
Very truly yours,
DENNIS BROVARONE
Dennis Brovarone
EXHIBIT 23.2
STEVEN HOLLAND, CPA
3914 MURPHY CANYONRD., STE. A126
SAN DIEGO, CA. 92123
(619) 279-1640
I have prepared the attached audited financial statements for Innovative
Medical Services for the fiscal years ended July 31, 1998 and 1997
contained in the Company's annual report on Form 10-ksb for the fiscal year
ended July 31, 1198 and do hereby consent to their inclusion with the
company's intended registration statement on Form
SB-2.
/s/STEVEN HOLLAND
- -----------------
Steven Holland, CPA
February 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1999
<PERIOD-START> AUG-01-1997 AUG-01-1998
<PERIOD-END> JUL-31-1998 OCT-31-1998
<CASH> 48,250 41,567
<SECURITIES> 0 0
<RECEIVABLES> 294,469 654,887
<ALLOWANCES> (17,850) (17,850)
<INVENTORY> 360,566 525,341
<CURRENT-ASSETS> 1,010,139 1,542,620
<PP&E> 1,043,317 1,095,314
<DEPRECIATION> (251,718) (285,235)
<TOTAL-ASSETS> 2,970,471 3,441,603
<CURRENT-LIABILITIES> 837,333 1,170,724
<BONDS> 0 0
0 0
0 0
<COMMON> 6,125,718 6,125,718
<OTHER-SE> (3,992,580) (3,854,839)
<TOTAL-LIABILITY-AND-EQUITY> 2,970,471 3,441,603
<SALES> 1,675,131 795,519
<TOTAL-REVENUES> 1,001,999 282,289
<CGS> 1,001,999 282,289
<TOTAL-COSTS> 2,614,676 377,982
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,941,544) 135,248
<INCOME-TAX> 800 200
<INCOME-CONTINUING> (1,940,744) 135,448
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,902,742) 137,741
<EPS-PRIMARY> (0.50) 0.04
<EPS-DILUTED> (0.27) 0.02
</TABLE>
